Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No o

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2003 computed by reference to the average bid and
asked prices of registrant’s common stock reported on the New York Stock
Exchange on such date was $ 262.3 million.

The number of shares outstanding of registrant’s Common Stock, $.001 par value
per share, as of March 10, 2004 was 33,317,633.

The information required by Part III (Items 10, 11, 12, 13 and 14) will be
incorporated by reference from the registrant’s Definitive Proxy Statement for
its 2004 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A.

This Form 10-K contains certain “forward-looking” statements within the
meaning of The Private Securities Litigation Reform Act of 1995 and information
relating to RailAmerica, Inc. and its subsidiaries that are based on the
beliefs of our management and that involve known and unknown risks and
uncertainties. When used in this report, the terms “anticipate,”“believe,”“estimate,”“expect” and “intend” and words or phrases of similar import, as
they relate to us or our subsidiaries or our management, are intended to
identify forward-looking statements. These statements reflect the current
risks, uncertainties and assumptions related to various factors including,
without limitation, currency risk, competitive factors, general economic
conditions, customer relations, fuel costs, the interest rate environment,
governmental regulation and supervision, the inability to successfully
integrate acquired operations, the ability to successfully market and sell
non-strategic and non-core properties and assets, the ability to service debt,
one-time events and other factors described under the heading “Factors
affecting our operating results, business prospects and market price of stock”
and elsewhere in this report and in other filings made by us with the
Securities and Exchange Commission. Based upon changing conditions, should any
one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described in this report as anticipated, believed, estimated or intended.
We undertake no obligation to update, and we do not have a policy of updating
or revising, these forward-looking statements. Except where the context
otherwise requires, the terms “we,”“us,” or “our” refer to the business of
RailAmerica, Inc. and its consolidated subsidiaries.

PART I

ITEM 1. BUSINESS

GENERAL

We are the largest owner and operator of short line freight railroads in
North America and a leading owner and operator of a regional freight railroad
in Australia. We own, lease or operate a diversified portfolio of 47 railroads
with approximately 11,900 miles of track located in the United States,
Australia and Canada. Through our diversified portfolio of rail lines, we
operate in numerous geographic regions with varying concentrations of
commodities hauled.

We are currently in discussions to sell our Australian railroad, Freight
Australia. We have engaged investment advisors and expect to complete the sale
during 2004. Accordingly, Freight Australia’s results of operations for the
periods presented have been reclassified to discontinued operations in our
consolidated financial statements.

In February 2004, we completed the sale of our 55% equity interest in
Ferronor, a Chilean railroad, for $18.1 million, consisting of $10.8 million of
cash, a secured instrument for $5.7 million due no later than June 2010 and a
secured instrument from Ferronor for $1.7 million due no later than February
2007, both bearing interest at LIBOR plus 3%. Ferronor’s results of operations
for the periods presented have been reclassified to discontinued operations in
our consolidated financial statements.

We were incorporated in Delaware on March 31, 1992 as a holding company
for two pre-existing railroad companies. Our principal executive office is
located at 5300 Broken Sound Blvd, N.W., Boca Raton, Florida33487, and our
telephone number at that location is (561) 994-6015.

Our Internet website address is www.railamerica.com. We make available
free of charge on or through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments
to these reports, as soon as reasonably practicable after we electronically
file such material with, or furnish such material to, the Securities and
Exchange Commission, or SEC. The SEC maintains an Internet site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov. We also
make available on our website other reports filed with the SEC under the
Securities Exchange Act of 1934, as amended, including proxy statements and
reports filed by officers and directors under Section 16(a) of that Act. These
reports may be found by selecting the option entitled “SEC FILINGS” in the
“INVESTOR RELATIONS” section on our website. Additionally, our corporate
governance guidelines, board committee charters, code of business conduct and
ethics and code of ethics for principal executive officers and senior financial
officers are available on our website and in print to any shareholder who
requests them. Information contained in or connected to our website is not part
of this report.

Since 1997, we have grown significantly through the following acquisitions:

•

In February 1997, we acquired a 55% equity interest in Ferronor, a Chilean regional railroad, for $7.2 million.

•

In April 1999, we acquired Freight Australia, an Australian regional railroad, for $103 million.

•

In July 1999, we acquired RaiLink, Inc., a holding company that
owned or had equity interests in 11 Canadian railroads, for $49.8
million.

•

In September 1999, we acquired the Toledo, Peoria, and Western
Railroad, for $17.4 million.

•

In February 2000, we acquired RailTex, Inc., a holding company
that owned 25 railroads in the United States and Canada, for $294.2
million.

•

In January 2002, we acquired StatesRail, Inc., a holding company
of 8 railroads in the United States, for $84.4 million.

•

In January 2002, we acquired ParkSierra Corp., a holding company
of 3 railroads in the United States, for $46.2 million.

•

In May 2003, we acquired a branch line, in Mobile, Alabama, that
is contiguous to our existing Alabama and Gulf Coast Railway for $15.1
million.

•

In June 2003, we acquired the San Luis & Rio Grande Railroad, a branch line in Colorado, for $7.2 million.

•

In January 2004, we acquired the Central Michigan Railway, for $25.3 million.

BUSINESS STRATEGY

INCREASE REVENUE THROUGH FOCUSED MARKETING EFFORTS AND RELIABLE RAIL
SERVICE. In North America and Australia, we strive to increase our revenue
through focused marketing efforts and cost effective and reliable service. In
North America, we work with customers, industrial development organizations and
our Class I interchange partners to develop transportation solutions to meet
the needs of our customers. We specialize in developing customer-driven
solutions for logistical issues, with local and regional marketing
representatives working directly with customers to ensure that rail
transportation services meet their needs. The operating focus of our North
American railroads is on meeting and exceeding the customer’s expectations by
providing frequent, dependable rail service at reasonable rates. In Australia,
we market our services to potential customers across the continent, as the open
access rules in that country allow us to operate over the track owned by other
companies, although most of our revenue is generated in the State of Victoria.

REDUCE DEBT TO 50% OF CAPITALIZATION. At December 31, 2003, our net debt
(defined as total long-term debt including debt attributable to Australia, less
cash) to total capitalization was 58%. Our goal is to reduce this amount to
50% by the end of 2004. We intend to accomplish this through our
previously
announced $100 million asset rationalization plan, retention of earnings and
generation of free cash flow. Our asset rationalization plan includes the sale
of our 55% equity interest in Ferronor, which was completed in
February 2004, the sale of
Freight Australia, our Australian railroad, as well as the sale of other
non-strategic and non-core assets in North America.

CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. Since 1997, we have made
ten significant acquisitions of railroad companies, which owned or had equity
interests in 53 railroads for total consideration in excess of $650 million.
All of these railroads have been successfully integrated into our operations
and in total have added in excess of 11,000 miles of track to our operations.

In North America, we seek acquisition candidates that enable us to form
geographic clusters of short lines, thereby affording economies of scale as
well as marketing and operating synergies. We also seek properties where
operating efficiencies can be realized from professional management techniques
and asset rationalization, thereby enabling the target railroad to reduce
operating costs and improve service. The resultant competitive pricing and
better service, coupled with a focused sales and marketing effort, typically
yields customer loyalty and increased carloads.

Acquisition opportunities in North America generally come from three
sources. First, certain Class I railroads have stated an intent to sell certain
branch lines during 2004. We believe, based on our strong operating performance
and relationships with the Class I railroads, we are a logical choice to
acquire some of these properties. Second, as the short line industry itself
continues to consolidate, we believe our industry reputation, demonstrated
access to capital, breadth of geographic coverage and ability to efficiently
evaluate and negotiate prospective transactions place us in a good position to
acquire other short lines or groups of short lines. Third, as

industrial companies divest of their railroad operations we believe our
cost-effective and customer oriented approach makes us a strong candidate to
acquire some of these railroads.

In acquiring rail properties, we compete with other railroad operators,
some of which have greater financial resources than we do. Competition for rail
properties is based primarily upon price, operating history and financing
capability. We believe our established reputation as a successful acquirer and
operator of short line rail properties, combined with our managerial resources,
effectively positions us to take advantage of future acquisition opportunities.

FINANCIAL INFORMATION ABOUT SEGMENTS

Financial information relating to our segments for each of the three years
in the period ended December 31, 2003 appears in Note 17 captioned “Segment
Information” of the Notes to Consolidated Financial Statements set forth in
Item 8 of this Annual Report at page F-29, and is incorporated herein by
specific reference.

NORTH AMERICAN RAILROADS

We currently own, lease or operate 46 rail properties in North America, of
which 45 are short line railroads that provide transportation services for both
on-line customers and Class I railroads that interchange with our rail lines.
Short line railroads are typically less than 350 miles long, serve a particular
class of customers in a small geographic area and interchange with Class I
railroads. Short line rail operators primarily serve customers on their line by
transporting products to and from the Class I interchanges. Each of our North
American rail lines is typically the only rail carrier directly serving its
customers. The ability to haul heavy and large quantities of freight as part of
a long-distance haul makes our rail services generally a more effective,
lower-cost alternative to other modes of transportation, including motor
carriers. In addition to our 45 short line railroads, we operate one tourist
railroad.

UNITED STATES. We own, lease or operate 37 short line rail properties and
one tourist railroad in the United States with approximately 6,900 miles of
track. Our properties are geographically diversified and operate in 26 states.
We have clusters of rail properties in the Southeastern, Southwestern,
Midwestern, Great Lakes, New England and Pacific Coast regions of the United
States. We believe that this cluster strategy provides economies of scale and
helps achieve operational synergies.

CANADA. We own, lease or operate 8 short line rail properties in Canada
with approximately 1,800 miles of track. Our Canadian properties are
geographically diversified and operate in five provinces and the Northwest
territories.

INDUSTRY OVERVIEW

The U.S. railroad industry is dominated by major Class I railroads, which
operated approximately 100,000 miles of track in 2002. In addition to large
railroad operators, there were more than 540 short line and regional railroads,
which operated approximately 41,000 miles of track in 2002.

The railroad industry is subject to regulations of various government
agencies, primarily the Surface Transportation Board, or STB. For regulatory
purposes, the STB classifies railroads into three groups: Class I, Class II and
Class III, based on annual operating revenue. For 2002, the Class I railroads
had operating revenue of at least $272.0 million, Class II railroads had
revenue of $21.8 million to $271.9 million, and Class III railroads had revenue
of less than $21.8 million. These thresholds are adjusted annually for
inflation.

In compiling data on the U.S. railroad industry, the Association of
American Railroads, or AAR, uses the STB’s revenue threshold for Class I
railroads. Regionals are railroads operating at least 350 miles of rail line
and/or having revenues between $40 million and the Class I revenue threshold.
Locals are railroads falling below the Regional criteria, plus switching and
terminal railroads.

As a result of deregulation in 1980, Class I railroads have been able to
concentrate on core, long-haul routes, while divesting many of their
low-density branch lines to smaller and more cost-efficient freight railroad
operators such as our company. Divesting branch lines allows Class I railroads
to increase traffic density, improve railcar utilization and avoid rail line
abandonment. Because of the focus by short line railroads on increasing traffic
volume through increased customer service and more efficient operations,
traffic volume on short line railroads frequently increases after divestiture
by Class I operators. Consequently, these transactions often result in net
increases in the divesting carriers’ freight traffic because much of the
business originating or terminating on branch lines feeds into divesting
carriers’ core routes.

SALES AND MARKETING

We focus on providing rail service to our customers that is easily
accessible, reliable and cost-effective. In many cases, we believe customer
service and sales and marketing at railroads that we have acquired have been
neglected by the previous owners. Due to the size of the Class I railroads and
their concentration on long-haul traffic, we believe the Class I operators
typically have not effectively marketed to customers on these branch line
operations.

Following commencement of operations, our railroads generally have
attracted increased rail shipments from existing customers and obtained traffic
from new customers who had not previously shipped by rail or had ceased rail
shipments. We believe our ability to generate additional traffic is enhanced by
our marketing efforts which are aimed at identifying and responding quickly to
the individual business needs of customers along our rail lines. As part of our
marketing efforts, we often schedule more frequent rail service, help customers
negotiate price and service levels with interchange partners and assist
customers in obtaining the quantity and type of rail equipment required for
their operations. We also provide non-scheduled train service on short notice
to accommodate customers’ special or emergency needs.

Our decentralized management structure is an important element of our
marketing strategy. We give significant discretion with respect to sales and
marketing activities to our North American regional marketing managers. Each
regional marketing manager works closely with personnel of our railroads and
with other members of senior management to develop marketing plans to increase
shipments from existing customers and to develop business from new customers.
We also work with the marketing staffs of the connecting Class I carriers to
develop an appropriate array of rail-oriented proposals to meet customers’
needs and with industrial development organizations to locate new rail users.
We consider all of our employees to be customer service representatives and
encourage them to initiate and maintain regular contact with shippers.

Rail traffic may be categorized as interline, local or bridge traffic.
Interline traffic either originates or terminates with customers located along
a rail line and is interchanged with other rail carriers. Local traffic both
originates and terminates on the same rail line and does not involve other
carriers. Bridge traffic passes over the line from one connecting rail carrier
to another.

Interline and local traffic generated 87%, 87% and 84% of our total
freight revenue in 2003, 2002, and 2001, respectively. We believe that high
levels of interline and local traffic provide us with greater stability of
revenue because this traffic represents shipments to or from customers located
along our lines and cannot be easily diverted to other rail carriers, unlike
bridge traffic.

Our railroads compete directly with other modes of transportation,
principally motor carriers and, to a lesser extent, ship and barge operators.
The extent of this competition varies significantly among our railroads.
Competition is based primarily upon the rate charged and the transit time
required, as well as the quality and reliability of the service provided, for
an origin-

to-destination package. To the extent other carriers are involved in
transporting a shipment, we cannot control the cost and quality of service.
Cost reductions achieved by major rail carriers over the past several years
have generally improved their ability to compete with alternate modes of
transportation.

The following table summarizes freight revenue by type of traffic carried
by our North American railroads in 2003, 2002 and 2001 in dollars and as a
percent of total freight revenue.

NORTH AMERICA
FREIGHT REVENUE
(DOLLARS IN THOUSANDS)

2003

2002

2001

$

%

$

%

$

%

Interline

$

261,742

83.2

%

$

235,408

81.5

%

$

165,821

76.5

%

Local

13,075

4.2

%

16,924

5.9

%

16,044

7.4

%

Bridge

39,844

12.6

%

36,430

12.6

%

34,901

16.1

%

$

314,661

100.0

%

$

288,762

100.0

%

$

216,766

100.0

%

All of our short line properties interchange traffic with Class I
railroads. The following table summarizes our significant connecting carriers
in 2003, 2002 and 2001 by freight revenue and carloads as a percentage of total
interchanged (interline and bridge) traffic.

NORTH AMERICA
INTERCHANGED TRAFFIC

2003

2002

2001

Revenue

Carloads

Revenue

Carloads

Revenue

Carloads

Union Pacific Railroad

28.8

%

27.9

%

30.2

%

28.3

%

22.2

%

23.2

%

Canadian National Railway

21.7

%

18.1

%

22.2

%

19.9

%

30.4

%

26.1

%

CSX Transportation

16.4

%

14.2

%

15.4

%

13.4

%

16.0

%

12.9

%

Burlington Northern Santa Fe Railway

12.5

%

14.2

%

13.3

%

14.5

%

6.2

%

5.9

%

Canadian Pacific Railway

8.6

%

11.7

%

8.7

%

11.3

%

12.8

%

16.6

%

Norfolk Southern

4.7

%

5.6

%

4.6

%

5.3

%

5.6

%

6.9

%

All other railroads

7.3

%

8.3

%

5.6

%

7.3

%

6.8

%

8.4

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

Charges for interchanged traffic are generally billed to the customers by
the connecting carrier and cover the entire transportation cost from origin to
destination, including the portion that travels over our lines. Our revenue is
generally paid directly to us by the connecting carriers rather than by
customers and is payable regardless of whether the connecting carriers are
able to collect from the customers. The revenue payable by connecting carriers
are set forth in contracts entered into by each of our railroads with their
respective connecting carriers and are generally subject to periodic
adjustments.

In 2003, we served approximately 1,600 customers in North America. These
customers shipped and/or received a wide variety of products. Although most of
our North American railroads have a well-diversified customer base, several of
the smaller rail lines have one or two dominant customers. In both 2003 and
2002, our 10 largest North American customers accounted for approximately 27%
of North American transportation revenue.

The following table sets forth by number and percentage the carloads
hauled by our North American railroads during the years ended December 31,2003, 2002 and 2001.

CARLOADS CARRIED BY COMMODITY GROUP

2003

2002

2001

COMMODITY GROUP

Carloads

%

Carloads

%

Carloads

%

Agricultural & Farm Products

98,453

8.6

%

95,005

8.6

%

80,835

9.1

%

Autos

33,893

3.0

%

43,843

4.0

%

45,962

5.1

%

Chemicals

85,054

7.5

%

84,554

7.6

%

66,915

7.5

%

Coal

142,927

12.5

%

134,082

12.1

%

95,433

10.7

%

Food Products

63,704

5.6

%

62,468

5.6

%

40,988

4.6

%

Intermodal

35,622

3.1

%

42,406

3.8

%

42,253

4.7

%

Lumber & Forest Products

127,485

11.2

%

124,025

11.2

%

88,351

9.9

%

Metals

88,745

7.8

%

80,117

7.2

%

52,184

5.9

%

Metallic/Non-metallic Ores

59,222

5.2

%

55,200

5.0

%

45,658

5.1

%

Minerals

48,925

4.3

%

45,900

4.1

%

19,424

2.2

%

Paper Products

98,002

8.6

%

94,471

8.5

%

64,914

7.3

%

Petroleum Products

48,925

4.3

%

41,702

3.9

%

28,593

3.2

%

Railroad Equipment/Bridge Traffic

178,464

15.7

%

179,589

16.2

%

200,565

22.5

%

Other

30,117

2.6

%

23,162

2.2

%

19,243

2.2

%

Total

1,139,538

100.0

%

1,106,524

100.0

%

891,318

100.0

%

EMPLOYEES

Currently, we have approximately 1,650 full-time railroad employees and
125 full-time corporate employees in North America. Approximately 820 of these
employees are subject to collective bargaining agreements.

SAFETY

We endeavor to conduct safe railroad operations for the benefit and
protection of employees, customers and the communities served by our railroads.
Our safety program, led by the Vice President of Safety and Operating
Practices, involves all of our employees and is administered by each Regional
Vice President. Operating personnel are trained and certified in train
operations, hazardous materials handling, personal safety and all other areas
subject to governmental rules and regulations. Each U.S. employee involved in
train operations is subject to pre-employment and random drug testing whether
or not required by federal regulation. We believe that each of our North
American railroads complies in all material respects with federal, state,
provincial and local regulations. Additionally, each railroad is given
flexibility to develop more stringent safety rules based on local requirements
or practices. We also participate in committees of the AAR, governmental and
industry sponsored safety programs including Operation Lifesaver (the national
grade crossing awareness program) and the American Short Line and Regional
Railroad Association Safety Committee. Our reportable injury frequency ratio,
measured as reportable injuries per 200,000 man hours worked, decreased to 2.03
in 2003 from 3.05 in 2002 and 3.37 in 2001.

REGULATION

UNITED STATES. Our subsidiaries in the United States are subject to
various safety and other laws and regulations by numerous government agencies,
including (1) regulation by the STB, and the Federal Railroad Administration,
or FRA, (2) labor related statutes including the Railway Labor Act, Railroad
Retirement Act, the Railroad Unemployment Insurance Act, and the Federal
Employer’s Liability Act, and (3) some limited regulation by agencies in the
states in which we do business.

The STB, established by the ICC Termination Act of 1995, has jurisdiction
over, among other matters, the construction, acquisition, or abandonment of
rail lines, the consolidation or merger of railroads, the assumption of control
of one railroad by another railroad, the use by one railroad of another
railroad’s tracks through lease, joint use or trackage rights, the rates
charged for their transportation services, and the service provided by rail
carriers.

As a result of the 1980 Staggers Rail Act, railroads have received
considerable rate and market flexibility including the ability to obtain
wholesale exemptions from numerous provisions of the Interstate Commerce Act.
The Staggers Rail Act allowed the deregulation of all containerized and truck
trailer traffic handled by railroads. Requirements for the creation of new

short line railroads or the expansion of existing short line railroads
were substantially expedited and simplified under the exemption process. On
regulated traffic, railroads and shippers are permitted to enter into contracts
for rates and provision of transportation services without the need to file
tariffs. Moreover, on regulated traffic, the Staggers Rail Act allows railroads
considerable freedom to raise or lower rates without objection from captive
shippers. While the ICC Termination Act retained maximum rate regulation on
traffic over which railroads have exclusive control, the new law relieved
railroads from the requirements of filing tariffs and rate contracts with the
STB on all traffic other than agricultural products.

CANADA. Our Canadian railroad subsidiaries are subject to regulation by
various governmental departments and regulatory agencies at the federal or
provincial level depending on whether the railroad in question falls within
federal or provincial jurisdiction. A Canadian railroad generally falls within
the jurisdiction of federal regulation if the railroad crosses provincial or
international borders or if the Parliament of Canada has declared the railroad
to be a federal work or undertaking and in selected other circumstances. Any
company which proposes to construct or operate a railway in Canada which falls
within federal jurisdiction is required to obtain a certificate of fitness
under the Canada Transportation Act, or CTA. Under the CTA, the sale of a
federally regulated railroad line is not subject to federal approval, although
a process of advertising and negotiating may be required in connection with any
proposed discontinuance of a federal railway. Federal railroads are governed by
federal labor relations laws.

Short line railroads located within the boundaries of a single province
which do not otherwise fall within the federal jurisdiction are regulated by
the laws of the province in question, including laws as to licensing and labor
relations. Most of Canada’s ten provinces have enacted new legislation, which
is more favorable to the operation of short line railroads than previous
provincial laws. Many of the provinces require as a condition of licensing
under the short line railroads acts that the licensees comply with federal
regulations applicable to safety and other matters and remain subject to
inspection by federal railway inspectors. Under some provincial legislation,
the sale of a provincially regulated railroad line is not subject to provincial
approval, although a process of advertising and negotiating may be required in
connection with any proposed discontinuance of a provincial railway.

Acquisition of additional railroad operations in Canada, whether federally
or provincially regulated, may be subject to review under the Investment Canada
Act, or ICA, a federal statute which applies to every acquisition of a Canadian
business or establishment of a new Canadian business by a non-Canadian. Whether
or not an acquisition is subject to review under the ICA is dependent on the
book value of the assets of the Canadian business being acquired. Acquisitions
that are subject to review must, before their completion, satisfy the Minister
responsible for administering the ICA that the acquisition is of net benefit to
Canada.

Any contemplated acquisitions may also be subject to the provisions of the
Competition Act federal antitrust legislation of general application. The
Competition Act contains merger control provisions which apply to certain
acquisitions. As a result, acquisitions exceeding specified asset and/or
revenue thresholds may be subject to pre-merger notification and subsequent
substantive review prior to their completion.

FREIGHT AUSTRALIA

We own Freight Australia, a regional freight railroad operating in the
State of Victoria, and adjoining states in Australia. Freight Australia was
purchased from the Government of the State of Victoria, Australia on April 30,1999 for total consideration of $103 million. Freight Australia operates over
3,150 miles of track under a prepaid 45 year lease from the State of Victoria.
We are currently in discussions to sell our Australian railroad, Freight
Australia. We have engaged investment advisors and expect to sell Freight
Australia during 2004. Accordingly, Freight Australia’s results of operations
for the periods presented have been reclassified to discontinued operations in
our consolidated financial statements.

The demographics and geography of Australia dictate that the freight
transport business is characterized by long distances and low volumes of
freight. Industrial flows tend to relate to production cycles and agricultural
product flows are seasonal and driven by export shipping schedules. Generally,
the pattern of surface freight movement in Australia comprises:

•

bulk materials and grains from inland areas, usually to the closest port or processing plant,

•

inputs to the resources industries from coastal industrial centers, ports and cities to the interior,

•

general freight between coastal industrial centers, ports and cities and the interior, and

•

interstate freight, comprising manufactured goods, steel, paper and
general freight between capital cities, and to and from major industrial
centers.

In recent years, the Australian rail freight sector’s share of the total
freight market has been maintained despite growth in road transport, largely
because of the growth in Australia’s coal and mineral exports. Over a period of
30 years, rail movements of these commodities have increased almost eightfold.

Major changes have taken place in the rail industry over the last decade,
partly as a result of the privatization of government-owned railways and the
entry of private sector participants in accordance with the competitive
neutrality provisions of the national Competition Principles Agreement. The
private sector has taken an increasingly larger role through outsourcing of
non-core activities by railway operators.

The railway network in Australia contains approximately 25,000 miles of
track, of which approximately 21,000 miles are track used for general and bulk
freight and passenger services. The remaining 4,000 miles are private sector
owned and operated, and principally serve Australia’s mining and primary
production industries.

SALES AND MARKETING

Freight Australia focuses on providing door-to-door rail service to
customers that is easily accessible, reliable and cost-effective since truck
and other rail operators are the principle competition. Due to improved
productivity and use of our rolling stock and the open access to track outside
of Victoria, we have been able to market to customers across the Australian
continent effectively.

Following commencement of operations, Freight Australia has attracted
increased rail shipments from existing customers and obtained traffic from new
customers who had not previously shipped by rail or had ceased rail shipments.
We believe that our ability to generate additional traffic is enhanced by our
marketing efforts, which are aimed at identifying and responding quickly to the
individual business needs of customers along the rail lines. As part of our
marketing efforts, we often schedule more frequent rail service. Freight
Australia also provides non-scheduled train service on short notice to
accommodate customers’ special or emergency needs.

Our decentralized management structure is an important element of our
marketing strategy. We give significant discretion with respect to sales and
marketing activities to our marketing managers. Each marketing manager works
closely with personnel in other departments to develop marketing plans to
increase shipments from existing customers and to develop business from new
customers. We consider all of our employees to be customer service
representatives and encourage them to initiate and maintain regular contact
with shippers.

Freight Australia’s customers span a variety of industries, with
particular emphasis on companies in the Australian agricultural industry for
whom we carry bulk grain and other agricultural products. One customer, AWB
Limited, represented 11% of Freight Australia’s operating revenue for the year
ended 2003, 20% for the year ended 2002 and 30% for the year ended 2001.
Additionally, track access fees from V/Line Passenger represented 16% of
Freight Australia’s operating revenue in 2003, 15% in 2002, and 13% in 2001.

The following table sets forth by dollar amount (in thousands of U.S.
dollars) and percentage Freight Australia’s transportation and infrastructure
revenue for the years ended December 31, 2003, 2002 and 2001.

2003

2002

2001

Revenue

%

Revenue

%

Revenue

%

Agricultural products

$

26,311

29

%

$

36,913

40

%

$

46,265

47

%

Track access fees

19,569

21

%

18,074

20

%

15,367

16

%

Intermodal containers

12,909

14

%

12,950

14

%

9,742

10

%

Fast Track parcel service

7,743

8

%

6,924

8

%

8,235

8

%

Bulk (i.e., cement, gypsum, stone, logs)

12,699

14

%

9,174

10

%

10,595

11

%

Interstate

12,497

14

%

7,626

8

%

8,428

8

%

Total transportation and infrastructure revenue

$

91,728

100

%

$

91,661

100

%

$

98,632

100

%

Freight Australia competes directly with other railroads in the open
access Australian railway network as well as with other modes of
transportation, principally motor carriers and, to a lesser extent, ship
operators. Competition is based primarily upon the rate charged and the transit
time required, as well as the quality and reliability of the service provided,
for an origin-to-destination package. Cost reductions achieved by Freight
Australia over the past several years have generally improved its ability to
compete with alternate modes of transportation.

EMPLOYEES

Freight Australia currently has 723 employees. Most of these employees are
subject to collective bargaining agreements.

SAFETY

Freight Australia endeavors to conduct safe railroad operations for the
benefit and protection of employees, customers and communities we serve.
Operating personnel are trained and certified in train operations, hazardous
materials handling, personal safety and all other areas subject to governmental
rules and regulations. Each employee involved in train operations is subject to
pre-employment and random drug testing whether or not required by federal or
state regulation. We believe that Freight Australia complies in all material
respects with federal, state and local regulations. Freight Australia holds
Rail Safety Accreditation in accordance with Australian Standards Regulations
4292 in Victoria, New South Wales, Queensland and South Australia. We also
participate in several governmental and industry sponsored safety programs.

REGULATION

Freight Australia is subject to regulation in the State of Victoria by the
Essential Services Commission (formerly the Office of the Regulator-General).
The Essential Services Commission, known as the ESC, was established by the
Essential Services Commission Act. The purpose of the ESC is to create a
regulatory framework for regulated industries which promotes and safeguards
competition and fair and efficient market conduct or, if there is no
competitive market, promotes the simulation of competitive market conduct and
the prevention of misuse of monopoly power. These objectives were expanded by
the Victorian Government in the Rail Corporations Act 1996 to ensure that rail
users have fair and reasonable access to declared railway services.

The Rail Corporations Act 1996, known as RCA, regulates the operation of
the State of Victoria’s passenger trains and trams and rail network. Part 2A of
the RCA outlines an access regime, which applies to railways and rail
infrastructure and gives power to the ESC to arbitrate on terms and conditions
of access to declared services.

The Secretary to the Department of Infrastructure may take disciplinary
action against an accredited railroad if the railroad has failed to comply with
the requirements of accreditation or has permitted an unsafe practice or acted
negligently. Disciplinary action, which the Secretary may take, includes
disqualifying the railroad from holding an accreditation for a period specified
by the Secretary, suspension of the accreditation, early expiry of the
accreditation and immediate or future cancellation of the accreditation.

The Transport Act contains detailed provisions authorizing the Secretary
of the Department of the Infrastructure to carry out inspections and giving
inspectors powers to enter and inspect premises (including testing equipment
and seizing property if appropriate). All actions must be reasonably necessary
to determine compliance with the Transport Act. A search warrant or prior
written consent of the occupier is necessary for entry into premises.

The Secretary must conduct safety audits of every person accredited at
least once every twelve months, to ensure that the accredited person is
complying with the requirements of accreditation. The Secretary may charge the
accredited person a fee for the safety audit service, subject to the limits set
out in the relevant regulations. An accredited person has a duty to inquire
into accidents and incidents.

FERRONOR

Ferronor owns and operates the only north-south railroad in northern
Chile, extending from La Calera near Santiago, where it connects with Chile’s
southern railway, Ferrocarril del Pacifico, S.A., to its northern terminus at
Iquique, approximately 120 miles south of the Peruvian border. It also operates
several east-west branch lines that link a number of iron, copper and mineral
salt mines and production facilities with several Chilean Pacific port cities.
Ferronor also serves Argentina and Bolivia through traffic interchanged with
the Belgrano Cargas Railroad and the Antofagasta (Chile)-Bolivia Railway. In
addition, commencing in 2002, Ferronor began operating the Porterillos Railway,
a customer-owned 57 mile freight railroad. In February 2004, we sold our
equity interest in Ferronor for $18.1 million, consisting of $10.8 million of
cash, a secured note for $5.7 million due no later than June 2010 and a secured
note from Ferronor for $1.7 million due no later than February 2007, both
bearing interest at LIBOR plus 3%. Ferronor’s results of operations have been
presented as discontinued operations in our financial statements.

On April 30, 1999, through our wholly owned subsidiary Freight Australia,
we prepaid a 45-year lease to operate 3,150 miles of track in the State of
Victoria, Australia. Freight Australia’s principal commodity is agricultural
products for use in southwestern Australia as well as export markets.

NORTH AMERICAN ROLLING STOCK

The following tables summarize the composition, as of December 31, 2003,
of our North American railroad equipment fleet.

FREIGHT CARS

TYPE

OWNED

LEASED

TOTAL

Covered hopper cars

55

2,323

2,378

Open top hopper cars

92

287

379

Box cars

101

2,507

2,608

Flat cars

214

1,086

1,300

Tank cars

6

4

10

Gondolas

3

502

505

Passenger cars

18

0

18

489

6,709

7,198

LOCOMOTIVES

HORSEPOWER/UNIT

OWNED

LEASED

TOTAL

Over 2,000

52

260

312

1,500 to 2,000

47

59

106

Under 1,500

18

15

33

117

334

451

AUSTRALIAN ROLLING STOCK

The following tables summarize the composition, as of December 31, 2003,
of our Australian railroad equipment fleet. We own all of our Australian
equipment fleet.

Based on current and forecasted traffic levels on our railroads,
management believes that our present equipment, combined with the availability
of other rail cars and/or locomotives for hire, is adequate to support our
operations. We believe that our insurance coverage with respect to our property
and equipment is adequate.

ADMINISTRATIVE OFFICES AND OTHER

We own a 59,500 square foot office building, located in Boca Raton,
Florida, where our executive offices are located. Of this space, 7,900 square
feet are leased to a third party. In addition, we lease approximately 21,000
square feet of office space in San Antonio, Texas for approximately $500,000
annually. The lease expires December 31, 2005.

Freight Australia’s administrative office is in Melbourne, Australia.
Freight Australia leases approximately 20,000 square feet of space from the
Victorian Government for $200,000 annually. The lease expires May 31, 2004. We
are in the process of negotiating a new long-term lease.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of conducting our business, we become involved in
various legal actions and other claims some of which are currently pending.
Litigation is subject to many uncertainties and we may be unable to accurately
predict the outcome of individual litigated matters. Some of these matters
possibly may be decided unfavorably to us. It is the opinion of management that
the ultimate liability, if any, with respect to these matters will not be
material. Other than ordinary routine litigation incidental to our business, no
other litigation exists.

In 2000, certain parties filed property damage claims totaling
approximately $26.3 million against RaiLink Ltd. and RaiLink Canada Ltd.,
wholly-owned subsidiaries of RailAmerica, Inc., and others in connection with
fires that allegedly occurred in 1998. We have vigorously defended these
claims and have insurance coverage up to approximately $15.5 million to cover
these claims. During January 2004, a settlement was reached with the principal
claimants for amounts within the insurance coverage. As a consequence,
management has determined that these claims will not have any adverse effect on
our financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 2003.

Our common stock began trading on the New York Stock Exchange (NYSE) on
January 2, 2002 under the symbol “RRA”. Prior to January 2, 2002, our common
stock traded on the Nasdaq National Market (Nasdaq) under the symbol “RAIL”.
Set forth below is high and low price information for the common stock as
reported on the NYSE for each period presented.

2002

High Sales Price

Low Sales Price

First Quarter

$

14.64

$

9.23

Second Quarter

11.31

8.50

Third Quarter

10.85

6.90

Fourth Quarter

8.20

6.50

2003

High Sales Price

Low Sales Price

First Quarter

$

7.65

$

4.44

Second Quarter

8.72

6.05

Third Quarter

9.84

7.16

Fourth Quarter

12.19

8.63

2004

High Sales Price

Low Sales Price

First Quarter (through March 10)

$

13.40

$

10.80

As of March 10, 2004, there were 615 holders of record of our common
stock. We have never declared or paid a dividend on our common stock. Our
senior credit agreement and the indenture governing our senior subordinated
notes limit our ability to pay dividends.

The results of our continuing operations for the years ended December 31,2003, 2002, 2001, 2000 and 1999 include the results of certain railroads from
the dates they were acquired as follows: San Luis and Rio Grande Railroad
effective June 29, 2003; the Mobile Line, effective June 1, 2003; StatesRail,
effective January 4, 2002; ParkSierra, effective January 8, 2002; RailTex,
effective February 1, 2000; RaiLink, effective August 1, 1999; and Toledo,
Peoria and Western Railway, effective September 1, 1999. The income statement
data for the years ended December 31, 2003, 2002 and 2001 and the balance sheet
data at December 31, 2003 and 2002 are derived from, and are qualified by
reference to, audited financial statements included elsewhere in this report
and should be read in conjunction with those financial statements and the notes
thereto. The income statement data set forth below for the periods ended
December 31, 2000 and 1999 and the balance sheet data as of December 31, 2001,
2000 and 1999 are derived from our financial statements not included. Freight
Australia and Ferronor have been presented as discontinued operations and thus
have been excluded from the income statement data and freight carloads within
the operating data.

Substantial Debt and Debt Service. As of December 31, 2003, we had
indebtedness of $533.3 million, including debt attributable to Australia, and,
as a result, we incur significant interest expense. The degree to which we are
leveraged could have important consequences, including the following:

•

our ability to obtain additional financing in the future for capital
expenditures, potential acquisitions, and other purposes may be limited
or financing may not be available on terms favorable to us or at all;

•

a substantial portion of our cash flows from operations must be used
to pay our interest expense and repay our debt, which reduces the funds
that would otherwise be available to us for our operations and future
business opportunities; and

•

fluctuations in market interest rates will affect the cost of our
borrowings to the extent not covered by interest rate hedge agreements
because our credit facilities bear interest at variable rates and only a
portion of our borrowings are covered by hedge agreements.

A default could result in acceleration of our indebtedness and permit our
senior lenders to foreclose on our assets.

As of December 31, 2003, we had $14.0 million of borrowings under our
revolving credit facility. This facility allows us to borrow a total of $100
million for any purpose and we may borrow up to an additional $100 million of
term debt in connection with acquisitions if we meet specified conditions. If
new debt is added to our current debt levels, the related risks that we face
would intensify. As of March 10, 2004, we had $46.7 million of borrowings
outstanding under the revolving credit facility. The increase in the revolver
balance is primarily due to the acquisition of the Central Michigan Railway in
January 2004.

pay dividends, redeem or repurchase our stock or make other distributions;

•

make acquisitions or investments;

•

use assets as security in other transactions;

•

enter into transactions with affiliates;

•

merge or consolidate with others;

•

dispose of assets or use asset sale proceeds;

•

create liens on our assets; and

•

extend credit.

Our credit facilities also contain financial covenants that require us to
meet a number of financial ratios and tests. Our failure to comply with the
obligations in our credit facilities and indenture could result in events of
default under the credit facilities or the indenture, which, if not cured or
waived, could permit acceleration of the indebtedness or our other
indebtedness, allowing our senior lenders to foreclose on our assets.

Fuel Costs. Fuel costs were approximately 7.0% of our revenue for the year
ended December 31, 2003, 6.9% for the year ended December 31, 2002 and 8.1% for
the year ended December 31, 2001. Fuel prices and supplies are influenced
significantly by international, political and economic circumstances. If fuel
supply shortages or unusual price volatility were to arise for any reason, the
resulting higher fuel prices would significantly increase our operating costs.
For 2003, approximately 35% of our fuel costs were subject to fuel hedges which
offset some of the rising costs. As of the date of this report, we have not
entered into any fuel hedges for fiscal year 2004.

Acquisitions and Integration. We have acquired many railroads since we
commenced operations in 1992 and intend to continue our acquisition program.
Acquisitions result in greater administrative burdens and operating costs and,
to the extent financed with debt, additional interest costs. The process of
integrating our acquired businesses may be disruptive to our business and may
cause an interruption of, or a loss of momentum in, our business.

If these disruptions and difficulties occur, they may cause us to fail to
realize the cost savings, revenue enhancements and other benefits that we
currently expect to result from an acquisition and may cause material adverse
short- and long-term effects on our operating results and financial condition.

Financing for acquisitions may come from several sources, including cash
on hand and proceeds from the incurrence of indebtedness or the issuance of
additional common stock, preferred stock, convertible debt or other securities.
The issuance of any additional securities could result in dilution to our
stockholders.

Continuing Relationships with Class I Carriers. The railroad industry in
the United States and Canada is dominated by a small number of Class I carriers
that have substantial market control and negotiating leverage. Almost all of
the traffic on our

North American railroads is interchanged with Class I
carriers. Our ability to provide rail service to our customers in North America
depends in large part upon our ability to maintain cooperative relationships
with Class I carriers with respect to, among other matters, freight rates, car
supply, reciprocal switching, interchange and trackage rights. In addition,
loss of customers or service interruptions or delays by our Class I interchange
partners relating to customers who ship over our track, may decrease our
revenue.

Class I carriers are also sources of potential acquisition candidates as
they continue to divest themselves of branch lines to smaller rail operators.
Failure to maintain good relationships may adversely affect our ability to
negotiate acquisitions of branch lines.

Foreign Operations. We currently have railroad operations in Australia and
Canada. We may, from time to time, consider acquisitions in other foreign
countries. The risks of doing business in foreign countries include:

•

adverse changes in the economy of those countries;

•

exchange rate fluctuations;

•

adverse effects of currency exchange controls;

•

restrictions on the withdrawal of foreign investment and earnings;

•

government policies against ownership of businesses by non-nationals;

•

the potential instability of foreign governments; and

•

economic uncertainties including, among others, risk of renegotiation
or modification of existing agreements or arrangements with governmental
authorities, exportation and transportation tariffs, foreign exchange
restrictions and changes in taxation structure.

Environmental and Other Governmental Regulation. Our railroad and real
estate ownership are subject to extensive foreign, federal, state and local
environmental laws and regulations. We could incur significant costs as a
result of any allegations or findings to the effect that we have violated, or
are strictly liable under these laws or regulations. We may be required to
incur significant expenses to investigate and remediate environmental
contamination. We are also subject to governmental regulation by a significant
number of foreign, federal, state and local regulatory authorities with respect
to our railroad operations and a variety of health, safety, labor,
environmental, maintenance and other matters. Our failure to comply with
applicable laws and regulations could have a material adverse effect on us.

Adverse economic conditions. Several of the commodities we transport come
from industries with cyclical business operations. As a result, prolonged
negative changes in domestic and global economic conditions affecting the
producers and consumers of the commodities carried by us may decrease
our revenue.

Natural events. Severe weather conditions and other natural phenomena,
including earthquakes, fires and floods, may cause significant business
interruptions and result in increased costs, increased liabilities and
decreased revenue.

Reliance on Australian Agriculture. Factors that negatively affect the
agricultural industry in the regions in which Freight Australia operates
negatively affect our profitability. These factors include drought or other
weather conditions, export and domestic demand and fluctuations in agricultural
prices. For the year ended December 31, 2003 approximately 26% of Freight
Australia’s revenue and for the year ended December 31, 2002 approximately 39%
of Freight Australia’s revenues were derived from the agricultural industry.
Our 2003 and 2002 results of operations were significantly adversely impacted
by a severe drought in Australia.

Risks of Our Australian Operations. In addition to the risks described
above, our Australian operations are subject to the risks and uncertainties
described below. In the event that we do not complete our proposed sale of
Freight Australia, the following risks may adversely affect our continuing
operations:

•

The applicable legislative framework enables third party rail
operators to gain access to the railway infrastructure on which we
operate for access fees. Recently, competitors were granted access to
our infrastructure. Because of this access, we may lose customers or be
forced to reduce rates to compete with third party rail operators.

•

Our access agreement with V/Line Passenger in Australia contains
penalty provisions if trains using the railway infrastructure are
delayed, early or cancelled under a variety of circumstances resulting
from our actions.

•

The director of public transport for the State of Victoria, Australia
may terminate our long-term railway infrastructure lease in specified
circumstances, including: (1) if we fail to maintain all necessary
accreditations; (2) if we fail to maintain railway infrastructure; and
(3) if we fail to maintain insurance. The director of public transport
has indicated a desire to reacquire ownership of some of the railway
infrastructure.

Depending on the harvest, our Australian subsidiary has generated between
11% and 19% of its total revenue under an agreement with AWB, Limited, the sole exporter of
Australian wheat. AWB, Limited may terminate the agreement under specified
limited circumstances.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS

GENERAL

Our growth is derived from increasing carloads and increasing our average
rate per carload on our existing railroads and from the acquisition of new lines.
Total North American “same railroad” carloads increased by approximately 1.5%
from 2002 to 2003, with the average rate per carload increasing from $261 to
$276. During 2003 we acquired two branch lines, one of which is contiguous
with our existing Alabama and Gulf Coast Railway. In January 2002, we acquired
StatesRail and ParkSierra, which included a total of ten freight railroads and
one tourist railroad. In January 2004, our wholly-owned subsidiary,
the Huron and Eastern Railway, completed the acquisition of the
Central Michigan Railway Company, which operates 100 miles of rail
line in Michigan, for $25.3 million in cash.

Our North American rail group operates 46 railroads. Each of these
railroads operates independently with their own customer base. While these
railroads are spread out geographically and carry diverse commodities, bridge
traffic accounted for 16%, coal accounted for 13%, and lumber and forest
products accounted for 11% of our carloads in North America during 2003. As a
percentage of revenue, which is impacted by several factors including the
length of the haul, lumber and forest products generated 16%, agricultural and
farm products generated 10% and chemicals generated 10% of our North American
freight revenue. Bridge traffic, which neither originates nor terminates on our
line, generally has a lower rate per carload and generated 7% of our freight
revenue.

The
number of carloads we transport of many of our commodities, including
automotives, chemicals, metals and lumber and forest products, is
partially dependent on the U.S. economy. The continued weakness in
the U.S. economy has impacted our “same railroad” carload
growth in 2003. In addition, while many of our costs are relatively
fixed, fuel costs, which represent 7% of total revenue, are variable
and were significantly impacted by high energy prices in 2003.

A major focus for us in 2003, which we expect to continue in 2004, is to
decrease our leverage through asset sales and the disposition of non-strategic,
non-core assets. In 2003, we sold one railroad for $2.6 million in cash and
completed an additional $3.3 million in other asset sales. Already in 2004, we have
completed the sale of our 55% equity interest in Ferronor, a Chilean railroad.
Ferronor’s results of operations have been reclassified to discontinued
operations in our consolidated financial statements.

We
are currently in discussions to sell our Australian railroad,
Freight Australia. We have engaged investment advisors and expect to complete a
sale during 2004. Accordingly, Freight Australia’s results of operations for
the periods presented have been reclassified to discontinued operations in our
consolidated financial statements.

Freight Australia has two primary sources of revenue. The first is freight
revenue, which comprised 77% of Freight Australia’s total revenue in 2003, with
agricultural products comprising 26% of total revenue in 2003. The level of
revenue from agricultural products is highly dependent on the annual grain
harvest in the State of Victoria. The grain harvest in the fourth quarter of
2002 was very poor due to the worst drought in many years in the grain regions
served by Freight Australia. As a result, revenue from transporting grain was
42% lower in 2003 than in 2002 and 2002 revenue was 21% lower than in 2001.
The second source of revenue is access fees paid to us by other passenger or
freight operators for the right to operate over our railroad. These amounts
accounted for 20% of Freight Australia’s revenue in 2003.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenue
and expenses during the reporting periods.

The critical financial statement accounts that are subject to significant
estimation are reserves for litigation, casualty and environmental matters,
Australian long service leave, deferred income taxes and property, plant and
equipment depreciation methods.

In accordance with Statement of Financial Accounting Standards, or SFAS,
No. 5, “Accounting for Contingencies,” an accrual for a loss contingency is
established if information available prior to the issuance of the financial
statements indicates that it is probable that a liability has been incurred or
an asset has been impaired. These estimates have been developed in consultation
with outside counsel handling our defense in these matters and are based upon
an analysis of potential results, assuming a combination of litigation and
settlement strategies. Subsequent changes to those estimates are reflected in
our statements of income in the period of the change.

Deferred taxes are recognized based on differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. We
regularly review our deferred tax assets for recoverability and establish a
valuation allowance based on historical taxable income, projected future
taxable income, and the expected timing of the reversals of existing temporary
differences. If we are unable to generate sufficient future taxable income, or
if there is a material change in the actual effective tax rates or time period
within which the underlying temporary differences become taxable or deductible,
we could be required to establish an additional valuation allowance against a
portion of our deferred tax asset, resulting in an increase in our effective
tax rate and an adverse impact on earnings.

Property, plant and equipment, including that of Freight Australia,
comprised 84% of our total assets as of December 31, 2003. These assets are
stated at cost, less accumulated depreciation. We use the group method of
depreciation under which a single depreciation rate is applied to the gross
investment in our track assets. Upon normal sale or retirement of track
assets, cost less net salvage value is charged to accumulated depreciation and
no gain or loss is recognized. Expenditures that increase asset values or
extend useful lives are capitalized. Repair and maintenance expenditures are
charged to operating expense when the work is performed. We periodically review
the carrying value of our long-lived assets for impairment. This review is
based upon our projections of anticipated future cash flows. While we believe
that our estimates of future cash flows are reasonable, different assumptions
regarding such cash flows could materially affect our evaluations.

Freight Australia maintains a long service leave program for its
employees. Under the program, an employee is entitled to paid leave of up to
13 weeks after they have performed 10 years of service. Key assumptions in
estimating this liability are the discount rate, annual rate of increase in
compensation levels, employee turnover and the number of years before employees
use the accrued leave.

For a complete description of our accounting policies, see Note 1 to our
consolidated financial statements.

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes beginning on Page F-1.

CONSOLIDATED 2003 COMPARED TO 2002

On a consolidated basis, we recorded income from continuing operations and
net income for 2003 of $24.7 million, or $0.75 per diluted share, and $14.7
million, or $0.46 per diluted share, respectively, compared with income from
continuing operations and net income for 2002 of $2.5 million, or $0.08 per
diluted share, and $2.2 million, or $0.07 per diluted share, respectively. Our
operating revenue increased $25.1 million, or 8%, to $358.4 million for the
year ended December 31, 2003, from $333.3 million for the year ended December31, 2002. This increase was primarily due to the acquisitions of the Mobile
Line and the San Luis and Rio Grande Railroad, the appreciation of the Canadian
dollar against the U.S. dollar and a 1.5% increase in same railroad carloads.
Operating income increased $9.0 million, or 14%, to $74.9 million for the year
ended December 31, 2003 from $65.9 million in the comparable period in 2002.
This increase was due to an increase of $7.4 million in North America’s
operating income in 2003, $7.5 million of bid and restructuring costs in 2002,
partially offset by a decrease in asset sale gains of $5.9 million from 2002.

Interest expense, including amortization of deferred financing costs,
decreased $3.4 million, or 10%, to $32.5 million for the year ended December31, 2003 from $35.9 million in the comparable period in 2002 primarily due to a
general decrease in interest rates and the refinancing of our senior debt in
May 2002, which resulted in a lower interest rate to us. For the years ended
December 31, 2003 and 2002, $4.9 and $4.6 million of interest expense was
allocated to discontinued operations, respectively. Other income (expense)
decreased $25.6 million in the year ended December 31, 2003 from 2002 due to
the 2002 write-off of our interest rate swaps, unamortized deferred financing
costs and other refinancing related costs from the terminated credit facility
which was originally entered into in 2000. Our effective tax rate for the year
ended December 31, 2003 was 42.0% compared to 44.2% in 2002.

Loss from discontinued operations increased $9.3 million in the year ended
December 31, 2003 to $10.0 million from $0.7 million in 2002 primarily due to
the drought in Australia, which resulted in a 42% decline in grain revenue. In
May 2002, we sold Texas New Mexico Railroad and recorded a gain from
discontinued operations of $0.8 million, after tax. This gain was partially
offset by an escrow settlement from the sale of Kalyn Siebert, our previously
discontinued trailer manufacturing operations, which resulted in a loss of $0.4
million, after tax.

CONSOLIDATED 2002 COMPARED TO 2001

On a consolidated basis, we recorded income from continuing operations and
net income for 2002 of $2.5 million, or $0.08 per diluted share, and $2.2
million, or $0.07 per diluted share, respectively, compared with income from
continuing operations and net income for 2001 of $6.8 million, or $0.29 per
diluted share, and $17.0 million, or $0.74 per diluted share, respectively.
Our operating revenue increased $87.2 million, or 35%, to $333.3 million in
2002 from $246.1 million in 2001. The
acquisitions of ParkSierra and StatesRail contributed $90.3 million to
operating revenue for the year. This increase was partially offset by a $3.1
million decrease from the disposal of Georgia Southwestern Railroad. Operating
income increased $14.9 million, or 29%, to $65.9 million from $51.0 million in
2001 primarily due to the acquisitions of ParkSierra and StatesRail, which
contributed $25.2 million to operating income, partially offset by $6.4 million
of failed bid costs, restructuring charges and increased corporate expenses to
support the ParkSierra and StatesRail operations.

Interest expense, including amortization of deferred financing costs,
decreased $6.1 million, or 15%, to $35.9 million for the year ended December31, 2002 from $42.0 million in 2001 primarily due to a general decrease in
interest rates and the refinancing of our senior debt in May 2002, which
resulted in a lower interest rate to us. For the years ended December 31, 2002
and 2001, $4.6 and $4.9 million of interest expense was allocated to
discontinued operations, respectively. In connection with our debt refinancing
in May 2002, we recorded a charge to other income (expense) of $25.6 million
for the write-off of our interest rate swaps, unamortized deferred loan costs
and other refinancing related costs.

Discontinued operations generated a loss of $0.7 million in 2002 compared
to income of $10.2 million in 2001 primarily due to the drought in Australia
which reduced the grain tonnage we transported to 3.7 million tons in 2002
compared to 5.0 million tons in 2001.

Our historical results of operations for our North American railroads
include the operations of our acquired railroads from the dates of acquisition
as follows:

NAME OF RAILROAD

DATE OF ACQUISITION

StatesRail (8 railroads)

January 2002

ParkSierra (3 railroads)

January 2002

Mobile Line

May 2003

San Luis and Rio Grande Railway

June 2003

We disposed of certain railroads as follows:

NAME OF RAILROAD

DATE OF DISPOSITION

Dakota Rail, Inc.

December 2001

Georgia Southwestern Railroad

March 2002

Texas New Mexico Railroad

May 2002

San Pedro & Southwestern Railway

October 2003

As a result, the results of operations for the years ended December 31,2003, 2002 and 2001 are not comparable in various material respects and are not
indicative of the results which would have occurred had the acquisitions or
dispositions been completed at the beginning of the periods presented.

OPERATING REVENUE. Operating revenue increased by $25.0 million, or 7.5%
to $358.0 million for the year ended December 31, 2003 from $333.0 million for
the year ended December 31, 2002 while carloads increased 3.0% to 1,139,538 in
2003 from 1,106,524 in 2002. Excluding revenue of $1.6 million in 2002 from the
disposed railroads, Texas New Mexico Railroad, Georgia Southwestern Railroad
and San Pedro and Southwestern Railway, and $9.8 million in 2003 from the
acquired railroads, San Luis and Rio Grande Railroad and the Mobile Line and
the disposed railroad San Pedro and Southwestern Railway, operating revenue
increased $16.7 million, or 5.1%, while carloads increased by 16,583, or 1.5%.
The increase in “same railroad” revenue was due to a 12% improvement in the
Canadian dollar, which positively impacted operating revenue by $8.4 million
for the year ended December 31, 2003, and an increase in carloads, where eleven
out of fourteen of our commodity groups increased in 2003 compared to 2002.

In addition, operating revenue in 2003 benefited from two short-term
contracts which we do not expect to recur in 2004. These contracts, which were
to move logs in Arizona and soil in Illinois, contributed a total of $2.7
million in revenue and 4,763 carloads during the year ended December 31, 2003.
The increase in the average rate per carload to $276 in 2003 from $261 in 2002
was primarily due to the improvement in the Canadian dollar.

The following table compares North American freight revenue, carloads and
average freight revenue per carload for the years ended December 31, 2003 and
2002:

Lumber and forest products revenue was $52.0 million in the year ended
December 31, 2003 compared to $48.6 million in the year ended December 31,2002, an increase of $3.4 million or 7%. This increase was due to a short-term
contract to haul logs in Arizona during 2003, a strong housing market, an
increase in demand for off-shore lumber and longer hauls of lumber in Alabama
as a result of the Mobile Line acquisition.

Chemicals revenue was $30.9 million in the year ended December 31, 2003
compared to $28.3 million in the year ended December 31, 2002, an increase of
$2.6 million or 9%. This increase was primarily due to longer hauls in Alabama
as a result of the Mobile Line acquisition and increased carloads with existing
customers and new business in South Carolina.

Agricultural and farm products revenue was $30.8 million in the year ended
December 31, 2003 compared to $27.9 million in the year ended December 31,2002, an increase of $2.9 million or 10%. This increase was due to an improved
wheat harvest in Kansas in 2003, partially offset by a poor 2002 harvest in
southern Ohio and Indiana, which impacted 2003 carloads and the closure of a
grain customer in California.

Paper products revenue was $29.5 million in the year ended December 31,2003 compared to $26.2 million in the year ended December 31, 2002, an increase
of $3.3 million or 12%. This increase was primarily due to new contracts and
longer hauls in Alabama as a result of the Mobile Line acquisition, an increase
in paper production in Nova Scotia, and the strengthening of the Canadian
dollar, partially offset by a decrease in carloads in Oregon as a result of a
paper mill closure.

Metals revenue was $28.4 million in the year ended December 31, 2003
compared to $24.4 million in the year ended

December 31, 2002, an increase of
$4.0 million or 17%. This increase was due to an increase in carloads from
existing customers in Ohio, North Carolina and South Carolina, new hauls in
Alabama as a result of the Mobile Line acquisition and the strengthening of the
Canadian dollar, partially offset by a decrease in carloads in California as a
result of customer production problems.

Coal revenue was $24.5 million in the year ended December 31, 2003
compared to $22.3 million in the year ended December 31, 2002, an increase of
$2.2 million or 10%. This increase was the result of increased carloads with
utility companies in Oklahoma, Indiana and Arkansas and new business in
Indiana, partially offset by a decrease in carloads from the Powder River Basin
due to severe weather in early 2003.

Bridge traffic revenue was $23.4 million in the year ended December 31,2003 compared to $22.3 million in the year ended December 31, 2002, an increase
of $1.1 million or 5%. This increase was primarily due to an increase in bridge
traffic in Canada along with the strengthening of the Canadian dollar,
partially offset by a decrease related to a General Motors contract that
Canadian National Railway lost to CSX Transportation in Ohio.

Food products revenue was $20.5 million in the year ended December 31,2003 compared to $19.8 million in the year ended December 31, 2002, an increase
of $0.7 million or 4%. This increase was primarily due to increased hauls in
California as a result of a good tomato harvest and new hauls in Alabama as a
result of the Mobile Line acquisition partially offset by a decrease in
carloads in Kansas due to a poor sunflower seed harvest.

Petroleum products revenue was $18.4 million in the year ended December31, 2003 compared to $16.2 million in the year ended December 31, 2002, an
increase of $2.2 million or 13%. This increase was primarily due to new
petroleum coke moves for a customer in Canada, new business to move liquefied
petroleum gas in New England, new business to move asphalt in Kansas and the
strengthening of the Canadian dollar.

Minerals revenue was $17.3 million in the year ended December 31, 2003
compared to $17.0 million in the year ended December 31, 2002, an increase of
$0.3 million or 2%. This increase was the result of new hauls on the Mobile
Line, an increase in roofing granule moves due to the strong housing market and
new calcium carbonate moves in Alabama, partially offset by fewer cement and
limestone moves in New England and a reduction in copper concentrate moves in
Arizona.

Metallic and non-metallic ores revenue was $17.2 million in the year ended
December 31, 2003 compared to $14.2 million in the year ended December 31,2002, an increase of $3.0 million or 21%. This increase was due to the
acquisitions of the Mobile Line and San Luis and Rio Grande Railroad, a
short-term contract to move soil in Illinois and increased traffic with
existing customers in Texas, partially offset by lower carloads in Arizona due
to customer production problems.

Other revenue was $9.3 million in the year ended December 31, 2003
compared to $7.7 million in the year ended December 31, 2002, an increase of
$1.6 million or 22%. This increase was primarily due to a short-term contract
in Illinois, partially offset by a decrease in ammunition moves in Washington.

Autos revenue was $8.1 million on the year ended December 31, 2003
compared to $9.8 million in the year ended December 31, 2002, a decrease of
$1.7 million or 18%. This decrease related primarily to a General Motors
contract that Canadian National Railway lost to CSX Transportation in Ohio.

Intermodal revenue was $4.2 million in the year ended December 31, 2003
compared to $4.1 million in the year ended December 31, 2002, an increase of
$0.1million or 4%. This increase was primarily due to a new contract to move
solid waste containers in Washington.

OPERATING EXPENSES. Operating expenses increased $17.6 million to $276.6
million in the year ended December 31, 2003 from $259.0 million in 2002
primarily due to the 12% increase in the Canadian dollar, the acquisitions of
the Mobile Line and San Luis and Rio Grande Railroad, higher transportation
labor costs associated with the increased carloads, higher fuel prices compared
to 2002 and increased casualty and insurance costs. The operating ratio,
defined as total operating expenses divided by total operating revenue, was
77.3% in 2003 compared to 77.8% in 2002. Both periods include an allocation of
expenses to general and administrative, which had previously been classified as
corporate overhead.

MAINTENANCE OF WAY. Maintenance of way expenses increased as a percentage
of revenue to 10.8% in the year ended December 31, 2003 from 10.4% in 2002, due
to higher contract labor costs in 2003 related to brush control, bridge repairs
and rail testing as a result of increased preventive maintenance initiatives.

MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense decreased as a
percentage of revenue to 3.8% in the year ended December 31, 2003 from 4.8% in
2002. The decrease is primarily due to the outsourcing of certain car repair
activities, which also reduced car repair revenue.

TRANSPORTATION. Transportation expense increased as a percentage of
revenue to 27.0% in the year ended December 31, 2003 from 26.4% in 2002 with
higher fuel and casualty costs primarily accounted for the increase in expense.
Fuel costs were $1.01 per gallon in 2003 compared to $0.87 per gallon in 2002
resulting in a $3.4 million increase in fuel expense in 2003, net of a $1.6
million benefit in 2003 for our fuel hedge. Casualty and insurance expenses
were up $1.8 million in 2003 from 2002. Notwithstanding the increase in
casualties and insurance, our personal injury frequency ratio, based upon the
industry standard of personal injuries per 200,000 man hours, decreased in 2003
to 2.03 from 3.05 in 2002.

EQUIPMENT RENTAL. Equipment rental decreased as a percentage of revenue to
9.8% in the year ended December 31, 2003 from 10.0% in 2002 due to improved
management of leased cars.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense decreased as a percentage of revenue to 19.3% in the year ended
December 31, 2003 from 19.7% in 2002. This decrease was primarily due to the
increase in revenue while selling, general and administrative expenses remained
relatively flat, due to the fixed nature of a majority of these expenses.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
comparable at 6.6% of revenue in the year ended December 31, 2003 and 6.5% in
2002.

OPERATING REVENUE. Operating revenue increased by $87.6 million, or 36%,
to $333.0 million for the year ended December 31, 2002 from $245.4 million for
the year ended December 31, 2001 while carloads increased 25% to 1,106,524 in
2002 from 891,318 in 2001. These increases are primarily due to the
acquisitions of ParkSierra and StatesRail. Excluding revenue of $91.4 million
in 2002 and $5.0 million in 2001 for the acquisitions of ParkSierra and
StatesRail and the dispositions of the Texas New Mexico Railroad and Georgia
Southwestern Railroad, operating revenue increased $1.1 million or 1% while
carloads decreased by 13,696 or 2%. The increase in “same railroad” revenue,
while carloads declined, is due to a change in commodity mix. While lower rated
bridge traffic declined 20,976 carloads in 2002, certain other commodities,
such as metals, increased from 2001. The average rate per carload increased in
2002 to $261 from $243 in 2001. The increase in the average

Lumber and forest products revenue was $48.6 million in the year ended
December 31, 2002 compared to $35.9 million in the year ended December 31,2001, an increase of $12.7 million or 35%. This increase consists of $11.2
million from the acquisitions of ParkSierra and StatesRail and an increase of
$1.5 million from the existing North American railroad operations resulting
from new business secured from forest product customers in Alberta and Oregon.

Chemicals revenue was $28.3 million in the year ended December 31, 2002
compared to $22.9 million in the year ended December 31, 2001, an increase of
$5.4 million or 24%. This increase is due to the acquisitions of ParkSierra and
StatesRail.

Agricultural and farm products revenue was $27.9 million in the year ended
December 31, 2002 compared to $20.5 million in the year ended December 31,2001, an increase of $7.4 million or 36%. This increase is primarily the result
of the acquisitions of ParkSierra and StatesRail.

Paper products revenue was $26.2 million in the year ended December 31,2002 compared to $20.8 million in the year ended December 31, 2001, an increase
of $5.4 million or 26%. This increase consists of $7.6 million from the
acquisitions of ParkSierra and StatesRail and an increase of $0.6 million from
the existing North American railroad operations, partially offset
by a decrease of $2.7 million from divested North American operations. The
increase of $0.6 million from existing North American railroad operations is
due to new business obtained in Oregon and Alberta.

Metals revenue was $24.4 million in the year ended December 31, 2002
compared to $14.6 million in the year ended December 31, 2001, an increase of
$9.8 million or 67%. This increase consists of $6.7 million from the
acquisitions of ParkSierra and StatesRail and an increase of $3.1 million from
the existing North American railroad operations resulting from increased
carloads from new business secured in North Carolina and our new steel train
service in Southern Ontario.

Bridge traffic revenue was $22.3 million in the year ended December 31,2002 compared to $23.0 million in the year ended December 31, 2001, a decrease
of $0.7 million or 3%. This decrease is due to the reduction of volume
associated with one of our railroads in eastern Canada during the third and
fourth quarters of 2002.

Coal revenue was $22.3 million in the year ended December 31, 2002
compared to $19.0 million in the year ended December 31, 2001, an increase of
$3.3 million or 17%. This increase is due to the acquisitions of ParkSierra and
StatesRail.

Food products revenue was $19.8 million in the year ended December 31,2002 compared to $12.0 million in the year ended December 31, 2001, an increase
of $7.8 million or 66%. This increase consists of $8.3 million from the
acquisitions of ParkSierra and StatesRail partially offset by a decrease of
$0.7 million from divested North American operations.

Minerals revenue was $17.0 million in the year ended December 31, 2002
compared to $7.3 million in the year ended December 31, 2001, an increase of
$9.7 million or 133%. This increase is due to the acquisitions of ParkSierra
and StatesRail.

Petroleum products revenue was $16.2 million in the year ended December31, 2002 compared to $9.8 million in the year ended December 31, 2001, an
increase of $6.4 million or 65%. This increase consists of $5.1 million from
the acquisitions of ParkSierra and StatesRail and an increase of $1.3 million
from the existing North American railroad operations due to new customers in
New England and new business secured to diamond mines in the Canadian Northwest
territories.

The change in the remaining commodities is primarily due to the
acquisitions of ParkSierra and StatesRail.

OPERATING EXPENSES. Total operating expenses increased by $66.2 million,
or 34%, to $259.0 million for the year ended December 31, 2002 from $192.8
million for the year ended December 31, 2001. The increase in operating
expenses is primarily due to the acquisitions of ParkSierra and StatesRail. The
operating ratios were 77.8% and 78.5% for the years ended December 31, 2002 and
2001, respectively.

MAINTENANCE OF WAY. Maintenance of way expenses increased as a percentage
of revenue to 10.4% in 2002 from 9.5% in 2001, primarily due to the reduction
of an environmental liability in 2001 of $1.9 million due to changes in
environmental regulations.

MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense decreased as a
percentage of revenue to 4.8% in 2002 from 4.9% in 2001. The decrease is
primarily due to a reduction in purchased services due to strict cost control
measures implemented in 2002, partially offset by an increase in car repairs on
equipment used by StatesRail properties.

TRANSPORTATION. Transportation expenses decreased as a percentage of
revenue to 26.4% in 2002 from 28.5% in 2001. Of this decrease, lower fuel
prices accounted for 1.0 percentage point as fuel costs were $0.87 per gallon
in 2002 compared to $1.00 per gallon in 2001. Lower labor costs accounted for
the other 1.1 percentage points. Labor costs were lower due to strict cost
control measures implemented in 2002.

EQUIPMENT RENTAL. Equipment rental expenses increased as a percentage of
revenue to 10.0% in 2002 from 9.8% in 2001, due to an increase in locomotive
lease expense as a result of the StatesRail and ParkSierra acquisitions,
partially offset by a decrease in car hire expense.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased as a percentage of revenue to 19.7% in 2002 from 19.3% in
2001 due to higher labor and insurance costs.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
remained constant in 2002 from 2001 at 6.5% of revenue.

CORPORATE OVERHEAD. Corporate overhead, which is included in selling,
general and administrative expenses in the consolidated statements of income,
was $9.6 million for the year ended December 31, 2003, a decrease of $6.0
million from $15.6 million in 2002. This decrease was primarily due to the
write-off of $3.3 million in 2002 for the failed bid costs in connection with
the proposed acquisition of National Rail and FreightCorp, two government-owned
railroads in Australia, a $1.4 million restructuring charge in 2002 relating to
the consolidation of the accounting and human resource functions from San
Antonio to Boca Raton and a $1.0 million restructuring charge relating to the
termination of certain executives in December 2002.

Corporate overhead increased $8.7 million to $15.6 million for the year
ended December 31, 2002 from $6.9 million for the year ended December 31, 2001.
This increase was primarily due to the write-off of $3.3 million in 2002 for
the failed bid costs in connection with the proposed acquisition of National
Rail and FreightCorp, a $1.4 million restructuring charge in 2002 relating to
the consolidation of the accounting and human resource functions from San
Antonio to Boca Raton and a $1.0 million restructuring charge relating to the
termination of certain executives in December 2002. The remaining increase was
due to increased headcount in 2002 to support the ParkSierra and StatesRail
acquisitions.

ASSET SALES. As part of our strategic plan, we continually review our
portfolio for under performing, non-core or non-strategic assets that can be
sold. Net gains on sales of assets were $3.3 million for the year ended
December 31, 2003. This gain primarily relates to land sales in Illinois, North
Carolina and Washington, which resulted in net gains of $1.8 million. Net
gains on sales of assets were $9.2 million for the year ended December 31,2002. The 2002 net gains primarily relate to the sale of the Georgia
Southwestern Railroad in March 2002 resulting in a gain of $4.5 million and a
sale of right-of-ways resulting in a gain of $3.5 million. In December 2001, we
sold Dakota Rail, Inc. and certain other assets for $9.8 million.

TERMINATED MOTOR CARRIER OPERATIONS. During the year ended December 31,2002, we recorded a charge of $1.3 million for the write-off of the remaining
assets from the motor carrier division.

INTEREST EXPENSE. Interest expense, including amortization of financing
costs, decreased from $42.0 million in 2001 to $35.9 million in 2002 and
continued to decrease to $32.5 million in 2003. The decrease in interest
expense from 2001 to 2002 and 2003 is primarily due to the refinancing of our
senior debt in May 2002, which resulted in a lower interest rate. Interest
expense of $4.9 million, $4.6 million and $4.9 million for 2001, 2002 and 2003,
respectively, has been allocated to discontinued operations.

OTHER INCOME (EXPENSE). In connection with the May 2002 refinancing of our
senior debt, we terminated our existing interest rate swaps. Because these
hedging instruments were designated as hedges of the cash flows under the
previous senior debt facility, SFAS No. 133 required the entire balance in
other accumulated comprehensive loss to be charged to earnings. Accordingly, a
charge of $17.1 million was recorded in other income (expense) during the year
ended December 31, 2002. Also in connection with the refinancing of our senior
debt in May 2002, we wrote off the unamortized balance of the deferred loan
costs relating to our old senior credit facility for a total charge of $6.6
million. We also incurred a charge of $2.0 million during 2002 to write-off
other refinancing related costs incurred in connection with our May 2002
refinancing. In connection with the reduction of our senior debt in July and August 2001,
we wrote off the respective unamortized portions of deferred loan costs for a
total charge of $0.5 million during the year ended December 31, 2001.

INCOME TAXES. Our effective tax rates in 2003, 2002 and 2001 for
continuing operations were 41.9%, 44.2% and 20.5%, respectively. In 2003, we
recorded a provision of $1.5 million from an increase in the Ontario, Canada
provincial tax rates. In 2001, we recorded a benefit of $3.1 million from a
reduction in the Canadian federal and provincial tax rates.

DISCONTINUED OPERATIONS. We are currently in discussions to sell our
Australian railroad, Freight Australia. We have engaged investment advisors
and expect to complete the sale during 2004. Accordingly, Freight Australia’s
results of operations for the periods presented have been reclassified to
discontinued operations. Freight Australia’s revenue increased $1.5 million,
or 2%, to $96.4 million for the year ended December 31, 2003 from $94.9 million
for the year ended December 31, 2002. Freight Australia’s 2003 revenue was
positively impacted by $16.3 million due to the strengthening of the Australian
dollar and new contracts to move fuel and logs entered into in the fourth
quarter of 2002, partially offset by the drought which significantly reduced
grain traffic. Freight Australia’s operating income decreased $12.0 million, or
262%, to a loss of $7.5 million in 2003 from income of $4.6 million in 2002
primarily due to the drought in Australia. The loss position was also amplified
by the strengthening Australian dollar. Grain tonnage moved in 2003 decreased
49% to 1.9 million tons from 3.7 million tons moved in 2002.

Freight Australia’s revenue decreased $6.5 million, or 6%, to $94.9
million for the year ended December 31, 2002 from $101.4 million for the year
ended December 31, 2001. Freight Australia’s 2002 revenue was impacted by the
drought which significantly reduced grain traffic, partially offset by a
strengthening of the Australian Dollar. Freight Australia’s operating income
decreased $15.6 million, or 77%, to $4.6 million in 2002 from $20.2 million in
2001 primarily due to the drought in Australia.

In February 2004, we completed the sale of our 55% equity interest in
Ferronor. Accordingly, we reclassified the operating results of Ferronor for
each of the years presented to discontinued operations. As such, the income
statements for the years ended 2003, 2002 and 2001, include $0.02 million, $1.0
million, and $1.5 million, (net of tax) respectively, of income from
discontinued operations for Ferronor.

In May 2002, we sold the Texas New Mexico Railroad for $2.3 million
resulting in a net gain of $1.3 million ($0.8 million, after tax). The gain has
been included in discontinued operations for the year ended December 31, 2002.
This gain was partially offset by an escrow settlement from the sale of Kalyn
Siebert, our previously discontinued trailer manufacturing operations, which
resulted in a loss of $0.4 million, after tax in 2002.

LIQUIDITY AND CAPITAL RESOURCES — COMBINED OPERATIONS

The discussion of liquidity and capital resources that follows reflects
our consolidated results and includes all subsidiaries. Our principal source of
liquidity is cash generated from operations. In addition, we may fund any
additional liquidity requirements through borrowings under our $100 million
revolving credit facility. Cash flows from operations less capital expenditures
was a net outflow of $3.0 million in 2003. Contributing to this cash outflow
was Freight Australia’s cash flow from operations less capital expenditures
which was a net outflow of $13.7 million for the year ended December 31, 2003,
as a result of the drought in Australia.

Our long-term business strategy includes the selective acquisition or
disposition of transportation-related businesses. Accordingly, we may require
additional equity and/or debt capital in order to consummate acquisitions or
undertake major business development activities. It is impossible to predict
the amount of capital that may be required for such acquisitions or business
development, and whether sufficient financing for such activities will be
available on terms acceptable to us, if at all. Our existing senior credit
facility allows us to borrow up to an additional $100 million of term debt in
connection with acquisitions if we meet specified conditions.

Operating Activities

Our cash provided by operating activities increased $29.9 million to $68.5
million for the year ended December 31, 2003 from $38.6 million for the year
ended December 31, 2002. The improvement in cash flows from operating
activities is primarily due to the termination of the interest rate swaps and
related costs in connection with our debt refinancing in 2002 as well as
improved working capital management in 2003, partially offset by a decrease in
operating cash flows from Australia due to the drought. Total cash provided by
operating activities for the year ended December 31, 2003 consists of $14.7
million in net income, $46.8 million in depreciation and amortization and $13.0
million in deferred taxes and other, partially offset by $3.0 million of
changes in working capital accounts and $3.3 million of asset sale gains
compared to $2.2 million in net income, $41.3 million of depreciation and
amortization, $25.4 million of refinancing costs and $3.0 million of deferred
taxes and other, partially offset by $9.7 million in asset sale gains and
$23.5 million of changes in working capital accounts in the year ended 2002.

Investing Activities

Cash used in investing activities was $88.1 million for the year ended
December 31, 2003 compared to $150.1 million for the comparable period in 2002.
The decrease is primarily due to the use of cash for the acquisitions of
ParkSierra and StatesRail, which totaled $89.4 million in 2002 compared to cash
used for acquisitions of $25.8 million in 2003 primarily for

the Mobile Line and San Luis and Rio Grande Railroad. Capital expenditures for the years ended
December 31, 2003 and 2002 were $71.5 million and $65.7 million, respectively.
Asset sale proceeds were $11.2 million for the year ended December 31, 2003
compared to $9.3 million in 2002. Deferred acquisition costs and other
accounted for $2.0 million of cash used in 2003 compared to $5.7 million in
2002. We expect capital expenditures in 2004 to be approximately $78.0
million, including Freight Australia, a discontinued operation. Freight
Australia’s capital expenditures were approximately $15.0 million in 2003 and
are expected to increase to approximately $25 million in 2004 due to
anticipated increases in traffic levels, upgrades to locomotives and the effect
of the strengthening Australian dollar.

Financing Activities

Cash provided by financing activities was $1.5 million for the year ended
December 31, 2003 compared to $79.3 million in 2002. The decrease of $77.8
million was primarily due to $50.0 million of borrowings in January 2002 used
to finance the acquisitions of ParkSierra and StatesRail and an additional
$50.0 million of borrowings in connection with refinancing of the senior credit
facility in May 2002. The primary source of cash in 2003 was $47.7 million of
borrowings on the revolving credit facility and $1.7 million of proceeds from
exercises of stock options, partially offset by $46.5 million of debt payments
and the purchase of treasury stock for $1.2 million.

As of December 31, 2003, we had a working capital deficit of $13.7 million
compared to working capital of $20.0 million at December 31, 2002. The working
capital deficit at December 31, 2003 is primarily due to the $21.5 million
reclassification of our junior convertible subordinated debentures to current
liabilities as their maturity date is July 31, 2004. The junior convertible
subordinated debentures may be converted into common stock prior to July 31,2004 at a conversion price of $10 per share. We are currently exploring
several alternatives for repaying or refinancing these securities, if they are
not converted prior to their redemption date. As of March 10, 2004, $8.8
million of our junior convertible subordinated debentures have been converted,
leaving a balance of $13.7 million. Our cash flows from operations and
borrowings under our credit agreements historically have been sufficient to
meet our ongoing operating requirements, capital expenditures for property,
plant and equipment, and to satisfy our debt service requirements.

As of December 31, 2002, we had working capital of $20 million compared to
$30 million as of December 31, 2001. This decrease was primarily due to the
private placement of common stock in December 2001, in which we raised $51
million. These funds were subsequently used to fund the acquisitions of
ParkSierra and StatesRail in January 2002, thus decreasing our cash balance and
reducing our working capital balance.

In May 2002, we refinanced our senior credit facility. The new senior
credit facility requires 1% annual principal amortization and provides (1) a
$265 million U.S. Term Loan, (2) a $50 million Canadian Term Loan, (3) a $60
million Australian Term Loan and (4) a $100 million revolving credit facility
which includes $82.5 million of U.S. dollar denominated loans, $10 million of
Canadian dollar denominated loans and $7.5 million of Australian dollar
denominated loans. The U.S. Term Loan, the Canadian Term Loan and the
Australian Term Loan mature on May 23, 2009 and the revolver loans mature on
May 23, 2008. In addition, we may incur additional indebtedness under the
credit facility consisting of up to $100 million aggregate principal amount of
additional term loans subject to the satisfaction of certain conditions set
forth in the credit
agreement including consent of the Administrative Agent and the Joint Lead
Arrangers under the credit facility and the satisfaction of all financial
covenants set forth in the credit facility on a pro forma basis on the date of
the additional borrowing. In September 2003, we prepaid $7.0 million on the
Canadian Term Loan. This resulted in a charge of $0.1 million to other income
(expense) on the income statement for the period ended December 31, 2003, for
the unamortized portion of deferred loan costs related to this debt. As of
December 31, 2003, we had $14.0 million outstanding under the U.S. dollar denominated portion of the $100 million
revolving credit facility.

At our option, the senior credit facilities bear interest at either (1)
the alternative base rate (defined as the greater of (i) UBS AG’s prime rate
and (ii) the Federal Funds Effective Rate plus 0.50%) if such loan is a Term
Loan or U.S. Revolving Loan or the Canadian Prime Rate (defined as the greater
of (i) UBS AG’s Canadian prime rate and (ii) the average rate for 30 day
Canadian Dollar bankers’ acceptances plus 1.0% per annum) if such loan is a
Canadian revolving loan plus 1.00% for the revolving credit facilities and
1.50% for the Term Loan facility, or (2) the reserve-adjusted LIBO rate (or, in
the case of Australian revolving loans, the BBSY Rate) plus 2.00% for the
revolving credit facility and 2.50% for the term loan facilities; provided,
that the additional amounts added to the alternative base rate and the LIBO
rate for the revolving credit facilities and the term loan facilities discussed
above are subject to adjustment based on changes in our leverage ratio. At
December 31, 2003 the interest rate on the term loan facilities was LIBOR plus
2.50%, or 3.69%. The default rate under the new senior credit

facility is 2.0%
above the otherwise applicable rate. The U.S. Term Loan and the U.S. dollar
denominated revolver are collateralized by the assets of and guaranteed by
RailAmerica, Inc. and its U.S. subsidiaries, the Canadian Term Loan and the
Canadian dollar denominated revolver are collateralized by the assets of and
guaranteed by RailAmerica, Inc. and its U.S. and Canadian subsidiaries, and the
Australian Term Loan and the Australian dollar denominated revolver are
collateralized by the assets of and guaranteed by RailAmerica, Inc. and its
U.S. and Australian Subsidiaries. The loans were provided by a syndicate of
banks with Morgan Stanley Senior Funding, Inc., as syndication agent, UBS AG,
Stamford Branch, as administrative agent and The Bank of Nova Scotia, as
collateral agent.

In connection with the refinancing of the senior credit facility in May
2002, we terminated our interest rate swap agreements resulting in a cash
payment of $17.1 million. Additionally, as required under our new senior
credit facility, we entered into two step-up collars for a total notional
amount of $75 million with an effective date of November 24, 2002 and expiring
on November 24, 2004. Under the terms of these collars, the LIBOR component of
our interest rates can fluctuate within specified ranges. As of December 31,2003, the fair value of these collars was a net liability of $1.6 million.

On June 25 2003, we entered into two interest rate swaps for a total
notional amount of $100 million for the period commencing November 24, 2003
through November 24, 2004. The fair value of these swaps was a net receivable
of $0.2 million at December 31, 2003.

All of these interest rate swaps, collars and corridors, qualify, are
designated and are accounted for as cash flow hedges under SFAS No. 133. More
information related to these cash flow hedges can be found under Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.

The May 2002 senior credit facility and the indenture governing our senior
subordinated notes include numerous covenants imposing significant financial
and operating restrictions on RailAmerica, Inc. The covenants limit our
ability to, among other things: incur more debt or prepay existing debt,
redeem or repurchase our common stock, pay dividends or make other
distributions, make acquisitions or investments, use assets as security in
other transactions, enter into transactions with affiliates, merge or
consolidate with others, dispose of assets or use asset sale proceeds, create
liens on our assets, make certain payments or capital expenditures and extend
credit. In addition, the senior credit facility also contains financial
covenants that require us to meet a number of financial ratios and tests. Our
ability to meet these ratios and tests and to comply with other provisions of
the new senior credit facility can be affected by events beyond our control.
Failure to comply with the obligations in the new senior credit facility could
result in an event of default under the new senior credit facility, which, if
not cured or waived, could permit acceleration of the indebtedness or other
indebtedness which could have a material adverse effect on us. We were in
compliance with each of these covenants as of December 31, 2003. One of the
significant financial covenants, which requires us to keep below a specified
ratio of debt to EBITDA (defined as income from continuing operations less
deferred income taxes, interest expense, depreciation and amortization expense)
on a twelve month rolling basis, will be changing in 2004. As of December 31,2003, the ratio that must be met is 4.75 or below. Our actual calculation for
this ratio as of December 31, 2003 was 4.685. In 2004, this ratio will be
reduced to 4.50 for the earnings period ending March 31, 2004, 4.25 for the
earnings period ending June 30, 2004 and 4.00 for the earnings period ending
September 30, 2004.

In January 2002, in connection with the acquisitions of ParkSierra and
StatesRail, we borrowed an additional $50 million under the then existing
senior credit facility. We originally entered into the credit agreement and
two bridge notes in connection with the acquisition of RailTex and the
refinancing of most of our and RailTex’s existing debt in February 2000. The
credit agreement and the two bridge notes have all been repaid.

Two primary uses of the cash provided by our operations are capital
expenditures and debt service. The following table represents the minimum
future payments on our existing long-term debt and lease obligations as of
December 31, 2003:

We occasionally repurchase our common stock under our share repurchase
program. These repurchases are limited to $5 million per year pursuant to our
borrowing arrangements. In July 2002, our board of directors authorized a 2
million share repurchase program through December 31, 2003, subject to
restrictions under our borrowing arrangements. During the years ended December31, 2003 and 2002, we repurchased 187,300 shares at a total cost of $1.2
million and 530,500 shares at a cost of $4.9 million, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 145, “Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.” SFAS No. 145, requires that debt extinguishments used
as part of a company’s risk management strategy should not be classified as an
extraordinary item. The requirement to reclassify debt extinguishments is
effective for fiscal years beginning after May 15, 2002. We have adopted SFAS
No. 145 as of January 1, 2003 and reclassified $4.5 million and $0.2 million of
extraordinary charges, net of tax, to continuing operations in 2002 and 2001,
respectively.

In January 2003, the FASB issued Interpretation No. 46, or FIN 46,
“Consolidation of Variable Interest Entities,” which is effective immediately
for variable interest entities created after January 31, 2003, and applies in
the first interim period beginning after June 15, 2003 for variable interest
entities created before February 1, 2003. FIN 46 addresses the consolidation of
variable interest entities through identification of a primary beneficiary. The
adoption of this pronouncement did not have a material impact on our financial
statements. In October 2003, the FASB deferred certain provisions of this
pronouncement until periods ending after December 15, 2003. These deferrals did
not impact our financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133
on Derivative Instruments and Hedging Activities.” SFAS No. 149, which is
effective for contracts entered into or modified after June 30, 2003, as well
as for hedging relationships designated after June 30, 2003, amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement 133, “Accounting for Derivative
Instruments and Hedging Activities.” The adoption of this pronouncement did not
have a material impact on our financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.”
SFAS No. 150, which is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, specifies that instruments
within its scope embody obligations of the issuer and that, therefore, the
issuer must classify them as liabilities. The adoption of this pronouncement
did not have a material impact on our financial statements. In November 2003,
the FASB deferred certain provisions of this pronouncement. These deferrals did
not impact our financial statements.

In December 2003, the FASB issued a revision to SFAS No. 132, “Employers’
Disclosures about Pensions and Other Postretirement Benefits.” SFAS 132, as
revised, requires additional and more frequent disclosures about the assets,
obligations, cash flows and net periodic benefit costs of defined benefit
pension plans and other postretirement benefit plans. This pronouncement is
effective, in part, for the December 31, 2003 financial statements and in full
for financial statements with fiscal years ending after December 31, 2003. The
interim period disclosures required by this Statement are effective for interim
periods beginning after December 15, 2003. We adopted SFAS 132, as revised, in
December 2003, resulting in additional disclosures in all periods presented in
this report. The adoption of SFAS 132, as revised, did not have a material
impact on our financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We currently use derivatives to hedge against increases in fuel prices and
interest rates. We formally document the relationship between the hedging
instrument and the hedged items, as well as the risk management objective and
strategy for
the use of the hedging instrument. This documentation includes linking the
derivatives that are designated as cash flow hedges to specific assets or
liabilities on the balance sheet, commitments or forecasted transactions. When
we enter into a derivative contract, and at least quarterly, we assess whether
the derivative item is effective in offsetting the changes in fair value or
cash flows. Any change in fair value resulting from ineffectiveness, as defined
by SFAS No. 133, is recognized in current period earnings. For derivative
instruments that are designated and qualify as cash flow hedges, the effective
portion of the gain or loss on the derivative instrument is recorded in
Accumulated Other Comprehensive Income (Loss), a separate component of
Stockholders’ Equity, and reclassified into earnings in the period during which
the hedge transaction affects earnings.

We monitor our hedging positions and credit ratings of our counterparties
and do not anticipate losses due to counterparty nonperformance.

FOREIGN CURRENCY. Our foreign currency risk arises from owning and
operating railroads in Canada and Australia. As of December 31, 2003, we had
not entered into any currency hedging transactions to manage this risk. A
decrease in either the Canadian dollar or the Australian dollar could
negatively impact our reported revenue and earnings for the affected period.
During 2003, the Australian dollar increased 20% while the Canadian dollar
increased 12%. The increase in the Canadian dollar led to an increase of $8.4
million in reported revenue and $3.0 million increase in reported operating
income, in 2003, compared to 2002. The increase in the Australian dollar led
to an increase of $16.3 million in Freight Australia’s revenue, but caused a
net decrease in Freight Australia’s operating income of $1.2 million, due to
its loss position.

On November 8, 2002, we entered into two interest rate swaps for a total
amount of $300 million for the period commencing December 5, 2002 through
November 24, 2003. Under the terms of the interest rate swaps, the LIBOR
component of our interest rate was fixed at 1.62% on $300 million of debt.
These interest rate swaps qualified, were designated and were accounted for as
cash flow hedges under SFAS No. 133. These swap agreements expired on November24, 2003.

On April 10, 2003, we entered into two interest rate collar corridors for
a total notional amount of $100 million with an effective date of November 24,2003 and expiring on November 24, 2005. Under the terms of these interest rate
collar corridors the LIBOR component of our interest rates can fluctuate
between 1.50% and 2.81%. However, if LIBOR exceeds 5.00%, we are responsible
for interest at that LIBOR rate. The interest rate collar corridors qualify,
are designated and are accounted for as cash flow hedges under SFAS No. 133.
The fair value of these interest rate collar corridors was a net liability of
$0.1 million at December 31, 2003.

On June 25 2003, we entered into two interest rate swaps for a total
notional amount of $100 million for the period commencing November 24, 2003
through November 24, 2004. The swaps qualify, are designated and are accounted
for as cash flow hedges under SFAS No. 133. Under the terms of the interest
rate swaps, we are required to pay a fixed interest rate of 1.16% on $50
million and 1.19% on the remaining $50 million while receiving a variable
interest rate equal to the 90 day LIBOR rate. The fair value of these swaps was
a net receivable of $0.2 million at December 31, 2003.

DIESEL FUEL. We are exposed to fluctuations in diesel fuel prices, as an
increase in the price of diesel fuel would result in lower earnings and
increased cash outflows. Fuel costs represented 7% of total revenues during the
year ended December 31, 2003. Due to the significance of fuel costs to our
operations and the historical volatility of fuel prices, we maintain a program
to hedge against fluctuations in the price of our diesel fuel purchases. Each
one-cent change in the price of fuel would result in a $0.3 million change in
fuel expense on an annual basis.

The fuel-hedging program includes the use of derivatives that are
accounted for as cash flow hedges. We do not have any hedges in place for 2004
or beyond.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of RailAmerica, the accompanying
notes thereto and the report of independent certified public accountants are included as part of
this Form 10-K and immediately follow the signature page of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES

Based on their evaluation as of the end of the period covered by this
annual report on Form 10-K, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934) are effective to ensure that information required to be disclosed by us
in the reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission’s rules and forms and that such
information is accumulated and communicated to our management, including its
principal executive and principal financial officers as appropriate to allow
timely decisions regarding required disclosure.

Information concerning directors, executive officers and nominees and our
code of ethics is incorporated by reference from our definitive proxy statement
relating to our 2004 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 14A on or before April 29, 2004.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated by reference
from our definitive proxy statement relating to our 2004 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A on or
before April 29, 2004.

Information concerning security ownership and securities issuable under
equity compensation plans is incorporated by reference from our definitive
proxy statement relating to our 2004 Annual Meeting of Stockholders to be filed
with the Commission pursuant to Regulation 14A on or before April 29, 2004.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning certain relationships and related transactions is
incorporated by reference from our definitive proxy statement relating to our
2004 Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14A on or before April 29, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning principal accounting fees and services is
incorporated by reference from our definitive proxy statement relating to our
2004 Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14A on or before April 29, 2004.

Credit agreement, dated as of May 23, 2002 among RailAmerica, Inc., Palm Beach
Rail Holdings, Inc., RailAmerica Transportation Corp., as borrower, RailAmerica
Canada Corp., as the Canadian term Borrower, Railink Ltd., as the Canadian
revolver Borrower, RailAmerica Australia Finance Pty., Ltd., as the Australian
Term Borrower, Freight Victoria Limited and RailAmerica Australia Pty., Ltd., as
the Australian Revolver Borrowers, various financial institutions from time to
time parties hereto, as the lenders, UBS Warburg LLC and Morgan Stanley Senior
Funding, Inc., as Joint Lead Arrangers and Bookrunners, Morgan Stanley Denior
Funding, Inc., as Syndication Agent for the lenders, UBS AG, Stamford Branch, as
the Administrative Agent for the lenders, The Bank of Nova Scotia , as Collateral
Agent for the lenders, and The Bank of Nova Scotia and Credit Lyonnais New York
Branch, as the Document Agents for the lenders. (33)

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of RailAmerica, Inc. and its subsidiaries at December 31, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company’s management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As described in Note 1, the Company changed its method of accounting for
debt extinguishments in 2003. As described in Note 14, the Company changed its method of accounting for derivative instruments and hedging activities in 2001.

The accompanying consolidated financial statements include the accounts
of RailAmerica, Inc. and all of its subsidiaries (the “Company”). All of
RailAmerica’s consolidated subsidiaries are wholly-owned except Empresa
De Transporte Ferroviario S.A. (“Ferronor”), a Chilean railroad, in which
the Company had a 55% equity interest until February 2004. All
intercompany balances and transactions have been eliminated. Certain
prior period amounts have been reclassified to conform to the 2003
presentation.

During the third quarter of 2003, the Company reclassified its Australian
railroad, Freight Australia, to discontinued operations as it is in the
process of selling its ownership interest. The Company has engaged
investment advisors and expects to complete the sale within the next
year. As a result, Freight Australia’s results of operations have been
reclassified to discontinued operations on the Company’s consolidated
financial statements.

In February 2004, the Company completed the sale of its 55% equity
interest in Ferronor, a Chilean railroad, for $18.1 million, consisting
of $10.8 million of cash, a secured instrument for $5.7 million due no
later than June 2010 and a secured instrument from Ferronor for $1.7
million due no later than February 2007, both bearing interest at LIBOR
plus 3%. Ferronor’s results of operations have been presented in
discontinued operations on the Company’s consolidated financial
statements.

The Company’s principal operations consist of rail freight transportation
in North America and Australia.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid instruments purchased with a
maturity of three months or less at the date of purchase to be cash
equivalents. The Company maintains its cash in demand deposit accounts,
which at times may exceed insurance limits. As of December 31, 2003, the
Company had approximately $13.3 million of cash in excess of insurance
limits.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, which are recorded at historical cost, are
depreciated and amortized on a straight-line basis over their estimated
useful lives. Costs assigned to property purchased as part of an
acquisition are based on the fair value of such assets on the date of
acquisition.

The Company self-constructs portions of its track structure and rebuilds
certain of its rolling stock. In addition to direct labor and material,
certain indirect costs are capitalized. Expenditures which significantly
increase asset values or extend useful lives are capitalized. Repairs and
maintenance expenditures are charged to operating expense when the work
is performed.

The Company uses the group method of depreciation under which a single
depreciation rate is applied to the gross investment in its track assets.
Upon normal sale or retirement of track assets, cost less net salvage
value is charged to accumulated depreciation and no gain or loss is
recognized. The Company periodically reviews its assets for impairment by
comparing the projected undiscounted cash flows of those assets to

their recorded amounts. Impairment charges are based on the excess of the
recorded amounts over their estimated fair value, as measured by the
discounted cash flows.

The Company incurs certain direct labor, contract service and other costs
associated with the development and installation of internal-use computer
software. Costs for newly developed software or significant enhancements
to existing software are capitalized. Research, preliminary project,
operations, maintenance and training costs are charged to operating
expense when the work is performed.

Depreciation has been computed using the straight-line method based on
estimated useful lives as follows:

Buildings and improvements

20-33 years

Railroad track

30-40 years

Railroad track improvements

3-10 years

Locomotives, transportation and other equipment

5-30 years

Office equipment and capitalized software

5-10 years

INCOME TAXES

The Company utilizes the liability method of accounting for deferred
income taxes. This method requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are expected to reverse. Deferred tax assets are also established for the
future tax benefits of loss and credit carryovers. The liability method
of accounting for deferred income taxes requires a valuation allowance
against deferred tax assets if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.

REVENUE RECOGNITION

The Company recognizes transportation revenue after the freight has been
moved from origin to destination. Other revenue is recognized as service
is performed.

FOREIGN CURRENCY TRANSLATION

The financial statements and transactions of the Company’s foreign
operations are maintained in their local currency, which is their
functional currency, except for Chile, where the U.S. dollar is used as
the functional currency. Where local currencies are used, assets and
liabilities are translated at current exchange rates in effect at the
balance sheet date. Translation adjustments, which result from the
process of translating the financial statements into U.S. dollars, are
accumulated in the cumulative translation adjustment account, which is a
component of accumulated other comprehensive income (loss) in
stockholders’ equity. Revenues and expenses are translated at the average
exchange rate for each period. Gains and losses from foreign currency
transactions are included in net income. At December 31, 2003,
accumulated other comprehensive income included $47.6 million of
cumulative translation adjustments.

STOCK-BASED COMPENSATION

As of December 31, 2003, the Company has three stock-based employee
compensation plans. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, “Accounting
for Stock Issued to Employees,” and related Interpretations. No stock
option-based

employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock
-Based Compensation,” to stock-based employee compensation.

Less: Total stock-based
employee compensation
determined under fair
value based method for all
awards, net of related tax
effects

(2,586

)

(4,257

)

(4,349

)

Pro forma net income (loss)

$

12,104

$

(2,104

)

$

12,689

Earnings (loss) per share:

Basic-as reported

$

0.46

$

0.07

$

0.78

Basic-pro forma

$

0.38

$

(0.07

)

$

0.58

Diluted-as reported

$

0.46

$

0.07

$

0.74

Diluted-pro forma

$

0.38

$

(0.07

)

$

0.54

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.” SFAS No. 145, requires that debt extinguishments
used as part of a company’s risk management strategy should not be
classified as an extraordinary item. The requirement to reclassify debt
extinguishments is effective for fiscal years beginning after May 15,2002. The Company adopted SFAS No. 145 on January 1, 2003 and
reclassified $4.5 million and $0.2 million of extraordinary charges, net
of tax, to continuing operations in 2002 and 2001, respectively.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”),
“Consolidation of Variable Interest Entities,” which is effective
immediately for variable interest entities created after January 31,2003, and applies in the first interim period beginning after June 15,2003 for variable interest entities created before February 1, 2003. FIN
46 addresses the consolidation of variable interest entities through
identification of a primary beneficiary. The adoption of this
pronouncement did not have a material impact on the Company’s financial
statements. In October 2003, the FASB deferred certain provisions of
this pronouncement until periods ending after December 15, 2003. These
deferrals did not impact the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133
on Derivative Instruments and Hedging Activities.” SFAS No. 149, which is
effective for contracts entered into or modified after June 30, 2003, as
well as for hedging relationships designated after June 30, 2003, amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement 133,
“Accounting for Derivative Instruments and Hedging Activities.” The
adoption of this pronouncement did not have a material impact on the
Company’s financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity.” SFAS No. 150, which is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June 15,2003, specifies that instruments within its scope embody obligations of
the issuer and that, therefore, the issuer must classify them as
liabilities. The adoption of this pronouncement did not have a material
impact on the Company’s financial statements. In November 2003, the FASB

deferred certain provisions of the pronouncement. These deferrals did not
impact the Company’s financial statements.

In December 2003, the FASB issued a revision to SFAS No. 132, “Employers’
Disclosures about Pensions and Other Postretirement Benefits.” SFAS 132,
as revised, requires additional and more frequent disclosures about the
assets, obligations, cash flows and net periodic benefit costs of defined
benefit pension plans and other postretirement benefit plans. This
pronouncement is effective, in part, for the December 31, 2003 financial
statements and in full for financial statements with fiscal years ending
after December 31, 2003. The interim period disclosures required by this
Statement are effective for interim periods beginning after December 15,2003. The Company adopted SFAS 132, as revised, in December 2003,
resulting in additional disclosures in all periods presented in this
report. The adoption of SFAS 132, as revised, did not have a material
impact on the Company’s financial statements.

2.

EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted average number
of common shares outstanding during the year while income from continuing
operations is reduced by preferred stock dividends and accretion.

Diluted earnings per share is calculated using the sum of the weighted
average number of common shares outstanding plus potentially dilutive
common shares arising out of stock options, warrants and convertible
securities. Options and warrants totaling 6.4 million, 4.4 million and
1.2 million were excluded from the diluted earnings per share calculation
for the years ended December 31, 2003, 2002 and 2001, respectively, as
well as assumed conversion of $21.8 million (2.2 million shares) of
convertible debentures in 2002 and 2001, as such securities were
anti-dilutive.

The following is a summary of the income from continuing operations
available for common stockholders and weighted average shares outstanding
(in thousands):

Income from continuing operations available
to common stockholders (basic)

24,667

2,482

6,531

Interest on convertible debt

1,279

—

—

Income from continuing operations available
to common stockholders (diluted)

$

25,946

$

2,482

$

6,531

Weighted average shares outstanding (basic)

31,806

32,047

21,510

Assumed conversion:

Options and warrants

350

573

1,196

Convertible debentures and preferred stock

2,180

—

—

Weighted average shares outstanding (diluted)

34,336

32,620

22,706

3.

DISCONTINUED OPERATIONS

The Company is in the process of selling its Australian railroad, Freight
Australia. The Company has engaged investment advisors and expects a sale
within the next year. Accordingly, Freight Australia’s results of
operations for the periods presented have been reclassified to
discontinued operations, net of applicable income taxes. In addition,
the assets and liabilities of Freight Australia have been reclassified as
assets and liabilities of discontinued operations on the December 31,2003 balance sheet. Gains realized on the sale of this business will be
reported in the period in which the divestiture is complete.

Interest expense was allocated to the Australian discontinued operations
as permitted under the Emerging Issues Task Force Issue No. 87-24,
“Allocation of Interest to Discontinued Operations,” for all periods
presented. For the twelve months ended December 31, 2003, 2002 and 2001,
$4.9 million, $4.6 million and $4.9 million, respectively, of interest
expense was allocated. The interest allocations were calculated based
upon the ratio of net assets to be discontinued less debt that is
required to be paid as a result of the disposal transaction to the sum of
total net assets of the Company plus consolidated debt, less debt
required to be paid as a result of the disposal transaction and debt that
can be directly attributed to other operations of the Company.

The results of operations for Freight Australia were as follows (in
thousands):

In February 2004, the Company completed the sale of its 55% equity
interest in Ferronor, a Chilean railroad, for $18.1 million, consisting
of $10.8 million of cash, a secured instrument for $5.7 million due no
later than June 2010 and a secured instrument from Ferronor for $1.7
million due no later than February 2007, both bearing interest at LIBOR
plus 3%. Ferronor’s results of operations have been presented in
discontinued operations, net of applicable taxes, on the Company’s
consolidated financial statements for all periods

presented. In addition, the assets and liabilities of Ferronor have been
reclassified as assets and liabilities of discontinued operations on the
December 31, 2003 and 2002 balance sheets (see Note 8 for description of
long-term debt).

The results of operations for Ferronor were as follows (in thousands):

On January 25, 2004, the Company’s wholly-owned subsidiary, the Huron and
Eastern Railway, completed the acquisition of the Central Michigan
Railway Company, which operates 100 miles of rail line in Michigan, for
$25.3 million in cash.

On June 1, 2003, the Company acquired 288 miles of track and trackage
rights connecting to the Alabama and Gulf Coast Railway for total
consideration of $15.1 million in cash. On June 29, 2003, the Company
acquired a 154 mile branch line in Colorado through its newly formed
subsidiary, San Luis & Rio Grande Railroad Company, for consideration of
$7.2 million in cash. During the first quarter of 2003, the Company
acquired 2.6 miles of track connecting to the Dallas, Garland &
Northeastern Railroad and 71.5 miles of track on the west-end of the
Toledo, Peoria &Western Railway for total consideration of $3.6 million
in cash. The pro forma impact of these acquisitions is not material.

On January 4, 2002, the Company acquired StatesRail, Inc. (“StatesRail”),
a privately owned group of railroads headquartered in Dallas, Texas,
which owned and operated eight railroads (including seven freight
railroads and a tourist railroad in Hawaii) with 1,647 miles of track in
11 states. Total consideration for the acquisition was $84.4 million,
consisting of $66.5 million in cash and 1.7 million shares of the Company’s
common stock valued at $17.9 million. In March 2004, we agreed to accept
$1.3 million in settlement of our escrow claims. Such amount will be
reflected as an adjustment of our purchase price in the first quarter of
2004. The following table presents the balances of each major asset and
liability caption of StatesRail as of the acquisition date (in
thousands):

On January 8, 2002, the Company acquired ParkSierra Corp. (“ParkSierra”),
a privately owned group of railroads headquartered in Napa, California,
which owned and operated three freight railroads with 703 miles of track
in four western states. Total consideration for the acquisition was $46.2
million, consisting of $23.2 million in cash and 1.8 million shares of the
Company’s common stock valued at $23 million. The following table
presents the balances of each major asset and liability caption of
ParkSierra as of the acquisition date (in thousands):

The cash components of the StatesRail and ParkSierra acquisitions were
financed through available cash and an additional $50 million term loan
under the Company’s prior senior credit facility (see Note 8).

The results of operations of StatesRail and ParkSierra have been included
in the Company’s consolidated financial statements since the dates of
their respective acquisitions.

The following unaudited pro forma summary presents the consolidated
results of operations for the Company as if the acquisitions of
StatesRail and ParkSierra had occurred at the beginning of 2001 and does
not purport to be indicative of what would have occurred had the
acquisition been made as of that date or results which may occur in the
future (in thousands, except per share data).

In January 2002, the Company submitted a bid for the acquisition of
National Rail and FreightCorp, two government-owned railroads in
Australia. Subsequently, the Company was notified that another entity was
awarded the bid. Accordingly, the Company recorded a charge in selling,
general and administrative
expense during the year ended 2002 of $3.3 million for the direct costs
incurred in preparing, submitting and financing the bid.

In October 2003, we sold the San Pedro and Southwestern Railway for $2.6
million in cash. The operating results of this railroad were not
material. No gain or loss was recognized on this transaction.

In December 2002, the Company sold a right-of-way in South Carolina for
total consideration of $4.25 million consisting of cash of $1.05 million
and a short-term note of $3.2 million. The short-term note was paid in
full on its due date of October, 31, 2003. The net gain on the
transaction was $3.5 million.

In May 2002, the Company sold the Texas New Mexico Railroad and certain
operating assets for total consideration of $2.25 million consisting of
cash of $0.55 million, a short-term note of $0.85 million and a long-term
note of $0.85 million, resulting in a net gain of $0.8 million which is
included in discontinued operations for the year ended December 31, 2002.
The results of operations for the Texas New Mexico Railroad were not
material. The short-term note accrued interest at 10% and was due on
November 15, 2002 and the long-term note accrues interest at 7% and is
due on May 24, 2007. In December 2002, $0.4 million was paid on the
short-term note, $0.15 million was added to the long-term note due on May24, 2007 and the remaining balance of $0.3 million was extended until
December 11, 2006 at an interest rate of 7%.

In March 2002, the Company sold the Georgia Southwestern Railroad and
certain operating assets for total consideration of $7.1 million,
including a long-term note for $0.8 million, resulting in a gain of $4.5
million. The note receivable bears interest at 5% and is due February28, 2007. The results of operations for the Georgia Southwestern Railroad
were not material.

During 2001, the Company sold Dakota Rail, Inc. for $7.6 million,
resulting in a net gain of $3.9 million. In addition, the Company sold
other non-core assets resulting in a net gain of $2.5 million.

In May 2002, the Company refinanced its senior credit facility,
including $50 million borrowed in connection with the January 2002
acquisitions of ParkSierra and StatesRail. The senior debt facility
includes a $375 million Term B loan facility consisting of $265
million of U.S. Term Loans, $50 million of Canadian Term Loans and
$60 million of Australia Term Loans with a 1% annual principal
amortization for seven years and the balance due in 2009, and a $100
million revolver with sub-limits equal to $82.5 million in the
United States, $10 million in Canada and $7.5 million in Australia.
The revolver is due in 2008. The interest rate on the Term B debt
and the revolver is LIBOR + 2.50% (3.65% at December 31, 2003).
There was $14.0 million outstanding under the revolver at December31, 2003 and no balance outstanding as of December 31, 2002. The
senior credit facility is collateralized by substantially all of the
assets of the Company, excluding its investment in Ferronor. As of
December 31, 2003, the $59.4 million balance of the Australian Term
Loan was included in the current ($0.6 million) and long-term
liabilities ($58.8 million) of discontinued operations on the
balance sheet.

The senior credit facility and the indenture governing our senior
subordinated notes include numerous covenants imposing significant
financial and operating restrictions on the Company. The covenants limit
the Company’s ability to, among other things: incur more debt or prepay
existing debt, redeem or repurchase the Company’s common stock, pay
dividends or make other distributions, make acquisitions or investments,
use assets as security in other transactions, enter into transactions
with affiliates, merge or consolidate with others, dispose of assets or
use asset sale proceeds, create liens on the Company’s assets,
make certain payments or capital expenditures and extend credit. In
addition, the senior credit facility also contains financial covenants
that require the Company to meet a number of financial ratios and tests.
The Company was in compliance with each of these covenants as of December31, 2003.

The aggregate annual maturities of long-term debt (including the
Australian Term Loan) are as follows (in thousands):

2004

$

4,159

2005

4,446

2006

4,485

2007

4,536

2008

18,591

Thereafter

354,022

$

390,239

During the years ended December 31, 2003, 2002 and 2001 interest of
approximately $0.5 million, $0.6 million, and $0.7 million, respectively,
was capitalized for on-going capital improvement projects.

On May 4, 2000, the Company entered into two interest rate swap
agreements for a total notional amount of $212.5 million. The agreements,
which had a term of three years, required the Company to pay a fixed
interest rate of 7.23% while receiving a variable interest rate equal to
the 90 day LIBOR rate. In May 2001, the interest rate swap agreements
were extended for two years and the fixed pay rate was reduced to 6.723%.
In connection with the refinancing in May 2002, the Company terminated
these existing interest rate swaps. Because these hedging instruments
were designated as hedges of the cash flows under the previous senior
debt facility, SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” required the entire balance in other accumulated
comprehensive loss to be charged to earnings. Accordingly, a charge of
$17.1 million was recorded in other income (expense) during the year
ended December 31, 2002. In addition, the Company recorded to other
income (expense) a charge of $6.7 million to write off the unamortized
deferred loan costs relating to the prior senior credit facility, as of
the date of refinancing.

On November 8, 2002, the Company entered into two interest rate swaps for
a total amount of $300 million for the period commencing December 5, 2002
through November 24, 2003. Under the terms of the interest rate swaps,
the LIBOR component of the Company’s interest rate was fixed at 1.62% on
$300 million of debt. The swaps qualified, designated and were accounted
for as cash flow hedges under SFAS No. 133. These swaps terminated as
planned on November 24, 2003.

On April 10, 2003, the Company entered into two interest rate collar
corridors for a total notional amount of $100 million with an effective
date of November 24, 2003 and expiring on November 24, 2005. Under the
terms of these interest rate collar corridors the LIBOR component of the
Company’s interest rates can fluctuate between 1.50% and 2.81%. However,
if LIBOR exceeds 5.00%, the Company is responsible for interest at that
LIBOR rate. The interest rate collar corridors qualify, are designated
and are accounted for
as cash flow hedges under SFAS No. 133. The fair value of these interest
rate collar corridors was a net liability of $0.1 million at December 31,2003.

On June 25, 2003, the Company entered into two interest rate swaps for a
total notional amount of $100 million for the period commencing November24, 2003 through November 24, 2004. The swaps qualify, are designated
and are accounted for as cash flow hedges under SFAS No. 133. Under the
terms of the interest rate swaps, the Company is required to pay a fixed
interest rate of 1.16% on $50 million and 1.19% on the remaining $50
million while receiving a variable interest rate equal to the 90 day
LIBOR rate. The fair value of these swaps was a net receivable of $0.2
million at December 31, 2003.

Leases

The Company has several finance leases for equipment. Certain of these
leases are accounted for as capital leases and are presented separately
below. The minimum annual lease commitments at December 31, 2003 are as
follows (in thousands):

CAPITAL

OPERATING

LEASES

LEASES

2004

$

83

$

25,124

2005

286

23,438

2006

303

20,997

2007

330

19,311

2008

359

15,173

Thereafter

250

20,607

$

1,611

$

124,650

Rental expense under operating leases was approximately $25.6 million,
$24.4 million, and $16.0 million for the years ended December 31, 2003,
2002 and 2001, respectively, including $2.3 million, $2.0 million and
$2.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively, from discontinued operations.

The following table presents Ferronor’s long-term debt balances, which
are included in Long-term liabilities of discontinued operations in the
balance sheet for the year ended December 31, 2003 (in thousands):

In August 2000, RailAmerica Transportation Corp. (“RTC”), a wholly-owned
subsidiary of the Company, sold units consisting of $130.0 million of
12-7/8% senior subordinated notes due 2010 and warrants to purchase
1,411,414 shares of the Company’s common stock in a private offering, for
gross proceeds of $122.2 million after deducting the initial purchasers’
discount. All of the Company’s U.S. subsidiaries are guarantors of the
senior subordinated notes. From August 16, 2003 through August 14, 2005,
the Company may not redeem the senior subordinated notes and subsequent
to August 14, 2005, the Company may redeem the senior subordinated notes
for 106.438% of their principal amount. The premium reduces annually on a
sliding scale until they may be redeemed at their principal amount
commencing August 15, 2008.

In August 1999, the Company issued $22.5 million aggregate principal
amount of junior convertible subordinated debentures. Interest on the
debentures accrues at the rate of 6% per annum and is payable
semi-annually. The debentures are convertible, at the option of the
holder, into shares of RailAmerica at a conversion price of $10. The
debentures which mature on July 31, 2004, are general unsecured
obligations and rank subordinate in right of payment to all senior
indebtedness. At RailAmerica’s option, the debentures may be redeemed at
par plus accrued interest, in whole or in part, if the closing price of
RailAmerica’s common stock is above $20 for 10 consecutive trading days.
There were $0.39 million of conversions of the junior convertible
subordinated debentures into common stock during 2001 and none in 2002
and 2003. As of March 10, 2004, a total of $8.8 million of the debentures have been
converted into common stock. As of July 31, 2003, the
debentures were reclassified to current liabilities as their maturity
date is July 31, 2004. The Company is currently exploring several
alternatives for repaying or refinancing these securities, if they are
not converted prior to their redemption date. As of March 10, 2004, the
remaining liability balance was $13.7 million.

10.

COMMON STOCK TRANSACTIONS

In December 2001, the Company closed on the private placement sale of 4.3
million shares of its common stock for $12.50 per share, resulting in net
proceeds of $51.5 million. The proceeds from this private placement were
used to finance a portion of the StatesRail and ParkSierra acquisitions,
which are described in Note 4, as well as the reduction of debt and other
general corporate purposes. In connection with this private
placement, the Company issued 24-month warrants to purchase 100,000
shares of common stock at an exercise price of $13.75 per share to the
placement agents. These warrants expired unexercised in December 2003.

In June 2001, the Company closed on the private placement sale of 3.8
million shares of its common stock for $10.75 per share, resulting in net
proceeds of $38.2 million. The proceeds from this private placement were
used to reduce debt and for general corporate purposes. In connection
with this private placement, the Company issued 18-month warrants to
purchase 200,000 shares of common stock at an exercise price of $11.825
per share to the placement agents. These warrants expired unexercised in
December 2002.

The Company occasionally repurchases its common stock under its share
repurchase program. Such repurchases are limited to $5 million per year
pursuant to its borrowing arrangements. In July 2002, the Board of
Directors authorized a 2 million share repurchase program through
December 31, 2003, subject to
restrictions under the Company’s borrowing arrangements. During the year
ended December 31, 2003 and 2002, the Company repurchased 187,300 shares
at a total cost of $1.2 million and 530,500 shares at a cost of $4.9
million, respectively.

The differences between the U.S. federal statutory tax rate and the
Company’s effective rate from continuing operations are as follows (in
thousands):

2003

2002

2001

Income tax provision, at 35%

$

14,864

$

1,556

$

3,010

Net benefit due to difference between U.S. &
Foreign tax rates

457

275

232

Net provision (benefit) due to tax law changes in Canada

1,509

—

(3,177

)

Permanent differences

(417

)

(174

)

170

State income taxes, net

861

(744

)

550

Other, net

(320

)

(171

)

356

Valuation allowance

849

1,221

630

Tax provision

$

17,803

$

1,963

$

1,771

The Company files a consolidated U.S. income tax return with its domestic
subsidiaries. For state income tax purposes, the Company and each of its
domestic subsidiaries generally file on a separate return basis in the
states in which they do business. The Company’s foreign subsidiaries file
income tax returns in their respective jurisdictions.

The components of deferred income tax assets and liabilities as of
December 31, 2003 and 2002 are as follows (in thousands):

2003

2002

Deferred tax assets:

Net operating loss carryforward

$

61,380

$

44,346

Alternative minimum tax credit

783

783

Accrued expenses

9,074

5,889

Total deferred tax assets

71,237

51,018

Less: valuation allowance

(6,849

)

(5,563

)

Total deferred tax assets, net.

64,388

45,455

Deferred tax liabilities:

Property, plant and equipment

230,087

195,543

Other

48

71

Net deferred tax liability

$

(165,747

)

$

(150,159

)

The liability method of accounting for deferred income taxes requires a
valuation allowance against deferred tax assets if, based on the weight
of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. It is management’s belief that
it is more likely than not that a portion of the deferred tax assets will
not be realized. The Company has established a valuation allowance of $
6.8 million at December 31, 2003 and $5.6 million at December 31, 2002.
The table below sets forth the changes in the deferred tax asset
valuation allowance:

The following is a summary of net operating loss carryforwards by
jurisdiction as of December 31, 2002 (in thousands):

AMOUNT

EXPIRATION PERIOD

U.S. — Federal

$

89,944

2012-2023

U.S. — State

224,929

2004-2023

Luxembourg

21

None

Australia

65,863

None

Canada

4,251

2004-2010

$

385,008

As part of certain acquisitions, the Company acquired net operating loss
carryforwards for federal and state income tax purposes. The utilization
of the acquired tax loss carryforwards may be limited by the Internal
Revenue Code Section 382. These tax loss carryforwards expire in the
years 2004 through 2020. As of December 31, 2003the Company had $52.9
million of U.S.-State net operating loss carryforwards that were
acquired through acquisitions.

No provision was made in 2003 for U.S. income taxes on undistributed
earnings of the Canadian or Australian subsidiaries as it is the
intention of management to utilize those earnings in their respective
operations for an indefinite period of time. During February 2004, our
55% equity interest in Ferronor, a Chilean railroad, was sold. The sale
of this equity interest is expected to result in a U.S. tax provision in 2004 of approximately $2.5 million
and a Chilean tax provision in 2004 of approximately $1.5 million.

12.

STOCK OPTIONS AND RESTRICTED STOCK

The Company has stock option plans under which employees and non-employee
directors may be granted options to purchase shares of the Company’s
common stock at the fair market value at the date of grant. Options
generally vest in two or three years and expire in ten years from the
date of the grant. The Company has adopted the disclosure-only
provisions of SFAS No. 123. See Note 1 for the total compensation costs
that would have been recognized in 2003, 2002, and 2001 if the stock
options issued were valued based on the fair value at the grant date.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2003, 2002 and 2001:
dividend yield 0.0%, 0.0% and 0.0%; expected volatility of 46%, 46% and 41%;
risk-free interest rate of 2.6%, 3.0% and 4.6%; and expected lives of 5,
5 and 5 years. The weighted average fair value of options granted for
2003, 2002 and 2001 were $3.68, $4.52, and $5.03, respectively.

The following table summarizes information about stock options
outstanding at December 31, 2003:

OPTIONS OUTSTANDING

OPTIONS EXERCISABLE

WEIGHTED

AVERAGE

WEIGHTED

WEIGHTED

RANGE OF

REMAINING

AVERAGE

AVERAGE

EXERCISE

NUMBER

CONTRACTUAL

EXERCISE

NUMBER

EXERCISE

PRICE

OF OPTIONS

LIFE

PRICE

OF OPTIONS

PRICE

$3.50-$5.00

174,634

2.26

$

4.52

174,634

$

4.52

$5.01-$7.50

388,234

5.54

$

6.54

388,234

$

6.54

$7.51-$10.00

1,907,307

6.07

$

8.73

1,762,207

$

8.75

$10.01-$14.45

2,748,000

8.30

$

11.03

2,260,891

$

11.18

5,218,175

4,585,966

The Company maintains an Employee Stock Purchase Plan for all full-time
employees. Each employee may have payroll deductions as a percentage of
their compensation, not to exceed $25,000 per year. The purchase price
equals 85% of the fair market value of a share of the Company’s common
stock on certain dates during the year. For the years ended December 31,2003, 2002 and 2001, 38,845, 25,081 and 21,943 shares of common stock,
respectively, were sold to employees under this plan.

In June 2003, the Company’s Board of Directors authorized the issuance of
170,650 restricted shares of common stock to approximately 75 employees.
Restricted stock awards are expensed ratably over the vesting period.
Restricted stock awards granted are scheduled to vest over three to five
years. Grants may vest earlier upon a qualifying disability, death,
retirement or change in control. This grant includes a performance
element that allows vesting to accelerate when certain performance
measures are met. These measures are based upon the attainment of a
specific Consolidated Earnings Per Share (“EPS”) of the Company as of the
last day of the calendar year ending immediately preceding the applicable
Vesting Date. If the measure is met for the first calendar year, then
one-third of the restricted stock will vest on the first anniversary.
This is true for the next two years and remains applicable for the fourth
year if one of the previous years’ targets are not met. On the fifth
anniversary of the grant date, any remaining balance of unvested shares
will become fully vested. Unearned compensation will be recognized as
compensation expense ratably over the remaining vesting periods. The
restricted stock amortization expense totaled $0.1 million for the year
ended December 31, 2003.

Cash paid for interest from financing activities during 2003, 2002 and
2001 was $33.7 million, $41.0 million and $54.6 million, respectively.
Cash paid (received) for income taxes during 2003, 2002 and 2001 was
$3.1 million, $0.2 million and $(1.1) million, respectively.

The amounts included in depreciation and amortization on the Consolidated
Statement of Cash Flows are comprised of the depreciation and amortization
expense for both continuing and discontinued operations as well as the
amortization of deferred financing costs for both continuing and
discontinued operations.

The following table summarizes the net cash used in acquisitions, net of
cash acquired, for the years ended December 31, 2003, 2002, and 2001 (in
thousands):

2003

2002

2001

Common stock issued for businesses acquired

$

—

$

40,905

$

—

Debt issued for business acquired

—

—

—

Details of acquisitions:

Working capital components, other than cash

—

(1,860

)

—

Property and equipment

(26,941

)

(173,249

)

—

Other assets

—

(9

)

—

Goodwill

—

(850

)

—

Notes payable and loans payable

—

1,531

—

Deferred income taxes payable

1,095

44,173

—

Net cash used in acquisitions

$

(25,846

)

$

(89,359

)

$

—

14.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company currently uses derivatives to hedge against increases in fuel
prices and interest rates. The Company formally documents the
relationship between the hedging instrument and the hedged item, as well
as the risk management objective and strategy for the use of the hedging
instrument. This documentation includes linking the derivatives that are
designated as cash flow hedges to specific assets or liabilities on the
balance sheet, commitments or forecasted transactions. The Company
assesses at the time a derivative contract is entered into, and at least
quarterly, whether the derivative item is effective in offsetting the
changes in fair value or cash flows. Any change in fair value resulting
from ineffectiveness, as defined by SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” is recognized in current
period earnings. For derivative instruments that are designated and
qualify as cash flow hedges, the effective portion of the gain or loss on
the derivative instrument is recorded in Accumulated Other Comprehensive
Income (Loss) as a separate component of Stockholders’ Equity and
reclassified into earnings in the period during which the hedge
transaction affects earnings.

The Company monitors its hedging positions and credit ratings of its
counterparties and does not anticipate losses due to counterparty
nonperformance.

Fuel costs represented 7% of total revenues during 2003. Due to the
significance of fuel expenses to the operations of the Company and the
historical volatility of fuel prices, the Company periodically hedges
against fluctuations in the price of its fuel purchases. The fuel hedging
program includes the use of derivatives that are accounted for as cash
flow hedges. For 2003, approximately 35% of the Company’s fuel costs were
subject to fuel hedges. The Company has not entered into any fuel hedges
for 2004 or beyond. The market is being closely monitored for reentry
points.

Interest on the Company’s senior credit facility is payable at variable
rates indexed to LIBOR. To partially mitigate the volatility of LIBOR,
the Company entered into two interest rate swaps in May 2000. These
swaps were accounted for as cash flow hedges under SFAS No. 133 and
qualified for the short cut method of recognition. The interest rate
swaps locked in a LIBOR rate of 7.23% on $212.5 million of debt for a

three-year period. In 2001, the Company extended the interest rate swaps
for two years and reduced the LIBOR rate to 6.723%. As noted in Note 8,
the Company terminated its interest rate swaps and reclassified $17.1 million from accumulated other comprehensive income (loss) against
earnings during the year ended 2002, in connection with the refinancing
of the senior credit facility.

On April 10, 2003, the Company entered into two interest rate collar
corridors for a total notional amount of $100 million with an effective
date of November 24, 2003 and expiring on November 24, 2005. Under the
terms of these interest rate collar corridors the LIBOR component of the
Company’s interest rates can fluctuate between 1.50% and 2.81%. However,
if LIBOR exceeds 5.00%, the Company is responsible for interest at that
LIBOR rate. The interest rate collar corridors qualify, are designated
and are accounted for as cash flow hedges under SFAS No. 133. The fair
value of these interest rate collar corridors was a net liability of $0.1
million at December 31, 2003.

On June 25, 2003, the Company entered into two interest rate swaps for a
total notional amount of $100 million for the period commencing November24, 2003 through November 24, 2004. The swaps qualify, are designated
and are accounted for as cash flow hedges under SFAS No. 133. Under the
terms of the interest rate swaps, the Company is required to pay a fixed
interest rate of 1.16% on $50 million and 1.19% on the remaining $50
million while receiving a variable interest rate equal to the 90 day
LIBOR rate. The fair value of these swaps was a net receivable of $0.2
million at December 31, 2003.

Fluctuations in the market interest rate will affect the cost of our
remaining borrowings. At December 31, 2003, Accumulated Other
Comprehensive Income (Loss) included a $ 1.0 million charge, net of
taxes, relating to the interest rate collars and swaps. Were the Company
to refinance the debt with terms different than the terms of the debt
currently hedged, the hedged transaction would no longer be effective and
any deferred gains or losses would be immediately recognized into income.

Management believes that the fair value of its senior long-term debt
approximates its carrying value based on the variable rate nature of the
financing, and for all other long-term debt based on current borrowing
rates available with similar terms and maturities. The fair value of the
senior subordinated notes is $150.8 million (face amount of $130 million)
as of December 31, 2003, based on the quoted market price.

The Company maintains a pension plan for a majority of its Canadian
railroad employees, with both defined benefit and defined contribution
components.

DEFINED BENEFIT — The defined benefit component applies to approximately
60 employees who transferred employment directly from Canadian Pacific
Railway Company (“CPR”) to a subsidiary of RailLink, Ltd. The defined
benefit portion of the plan is a mirror plan of CPR’s defined benefit
plan. The employees that transferred and joined the mirror plan were
entitled to transfer or buy back prior years of service. As part of the
arrangement, CPR transferred to the Company the appropriate value of each
employee’s pension entitlement.

Freight Australia’s employees participate in the Victorian government’s
superannuation funds. The contributions made by Freight Australia are as
follows for the year ended December 31, 2003, 2002 and December 31, 2001
(in thousands):

2003

2002

2001

Total contributions

$

2,308

$

2,012

$

1,566

DEFINED CONTRIBUTION — The defined contribution component applies to a
majority of the Company’s Canadian railroad employees that are not
covered by the defined benefit component. The Company contributes 3% of a
participating employee’s salary to the plan. Pension expense for the
year

ended December 31, 2003, 2002 and 2001 for the defined contribution
members was $0.6 million, $0.5 million and $0.3 million, respectively.

PROFIT SHARING PLAN — The Company maintains a contributory profit sharing
plan as defined under Section 401(k) of the U.S. Internal Revenue Code.
The Company made contributions to this plan at a rate of 50% of the
employees’ contribution up to a maximum annual contribution of $1,500 per
eligible employee. An employee becomes 100% vested with respect to the
employer contributions after completing five years of service. Employer
contributions during the years ended December 31, 2003, 2002 and 2001
were approximately $0.7 million, $0.6 million and $0.5 million,
respectively.

16.

COMMITMENTS AND CONTINGENCIES

In 2000, certain parties filed property damage claims totaling
approximately $26.3 million against RaiLink Ltd. and RaiLink Canada Ltd.,
wholly-owned subsidiaries of RailAmerica, Inc., and others in connection
with fires that allegedly occurred in 1998. The Company vigorously
defended these claims and has insurance coverage up to approximately
$15.5 million to cover these claims. During January 2004, a settlement
was reached with the principal claimants for amounts within the insurance
coverage. As a consequence, management has determined that these claims
will not have any adverse effect on the Company’s financial position,
results of operations or cash flows.

In the ordinary course of conducting its business, the Company becomes
involved in various legal actions and other claims, which are pending or
could be asserted against the Company. Litigation is subject to many
uncertainties, the outcome of individual litigated matters is not
predictable with assurance, and it is reasonably possible that some of
these matters may be decided unfavorably to the Company. It is the
opinion of management that the ultimate liability, if any, with respect
to these matters will not have a material adverse effect on the Company’s
financial position, results of operations or cash flows.

The Company has a $4.7 million contingent obligation, under certain
events of default or if line abandonment occurs, to the Canadian National
Railroad in connection with its properties. The contingent obligation
bears no interest and has no pre-defined terms of payment or maturity.

The Company’s operations are subject to extensive environmental
regulation. The Company records liabilities for remediation and
restoration costs related to past activities when the Company’s
obligation is probable and the costs can be reasonably estimated. Costs
of ongoing compliance activities to current operations are expensed as
incurred. The Company’s recorded liabilities for these issues represent
its best estimates (on an undiscounted basis) of remediation and
restoration costs that may be required to comply with present laws and
regulations. During the fourth quarter of 2001, the Company reduced its
environmental liability by $1.9 million due to a change in environmental
regulations. The remaining liabilities are not material. It is the
opinion of management that the ultimate liability, if any, with respect
to these matters will not have a material adverse effect on the Company’s
financial position, results of operations or cash flows.

The Company’s continuing operations have been classified into two
business segments: North American rail transportation and International
rail transportation. The North American rail transportation segment
includes the operations of the Company’s railroad subsidiaries in the
United States and Canada, as well as corporate expenses. The
international segment has been restated for the exclusion of the Chilean
and Australian operations except for total assets and capital
expenditures, due to their reclassification to discontinued operations.

Business and geographical segment information for the years ended
December 31, 2003, 2002 and 2001 is as follows (in thousands):

All quarterly financial data has been restated for the inclusion of
Ferronor’s and Freight Australia’s results in discontinued operations. The
diluted earnings per share for each quarter will not necessarily add-up to the
amount reported for the entire fiscal year on the Consolidated Statements of
Income due to variations in the calculation for each quarter related to
convertible debt .

In August 2000, RailAmerica Transportation Corp. (“Issuer”), a
wholly-owned subsidiary of RailAmerica, Inc. (“Parent”), sold units
including 12 7/8% senior subordinated notes, which are registered with
the Securities and Exchange Commission. The notes are guaranteed by the
Parent, the domestic subsidiaries of the Issuer and Palm Beach Rail
Holdings, Inc.